Politics keeps US rates from following European rates up. Focus turns to Yellen testimony. Return of receiving interest noted in local markets

By Jason Wong

In the bond market, European 10-year rates in the key markets were up about 1 bp, suggesting that yesterday’s reversal in trend was a one-day wonder, and this lent some support for higher US rates. 

But the Trump headlines have seen the 10-year Treasury rate nudge down to 2.36%, over 2 bps lower relative to the NZ close.

In a speech, the Fed’s Brainard offered her usual dovish tone, observing that the Fed hasn’t got much more to do to get to a neutral level policy rate and sounding cautious about inflation, although she seemed comfortable with the idea of some balance sheet roll-off “soon”.

The focus tonight turns to Fed Chair Yellen’s testimony to the US House Panel.  We think the testimony will support the prevailing Fed view that it is on a clear path towards normalisation of monetary policy.  Last Friday’s US monetary policy report didn’t contain a lot new, although there was a restatement of plans to continue to tighten policy. There appeared to be an enhanced interest in financial stability concerns – citing stretched valuations in bond, equity, and commercial real estate prices– which was also one of the takeaways from the FOMC minutes last week.  Yellen might choose to draw this out in her testimony, which would provide some rationale for higher rates even if the inflation backdrop wasn’t as strong as desired.

There will also be focus on the Bank of Canada’s rate decision.  If the Bank chooses to forgo a widely expected hike, then that could rock the global bond market seeing yields tumble.

NZ rates were down around 1-2 bps across the swap curve, against the modest upward pressure that Australia’s curve was facing, with the contrasting economic releases likely playing a role in that. 

We saw some receiving interest in the market, a welcome change from the generally one-sided payside pressure that has been evident for the past couple of weeks.

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Jason Wong is on the BNZ Research team. All its research is available here.