Ripples from China's devaluation hit local swap yields. Expect further flattening of rate curve today. Unease boost safe-haven bonds

By Kymberly Martin

The NZ curve underwent a slight ‘bull’ steepening yesterday.

Overnight, US 10-year yields traded down from 2.20%, to 2.13% currently.

NZ swaps pushed a little higher across the curve yesterday morning. However, in the afternoon, NZ swaps moved lower after the People’s Bank of China engineered a lower onshore Renminbi, by fixing the USD/CNY rate almost 2% higher.

The surprise move sent ripples through most markets. AU 3-year swap traded down from 2.27%, to 2.18% currently, also assisted by some softening in the AU NAB business survey.

NZ 2-year swap closed down 2 bps, at 2.87%, as the market looks for the NZ OCR to be cut to 2.53% within H1 next year. The NZ 2-10s curve steepened a little, to 79 bps. However, the steepening is unlikely to be sustained given offshore moves seen overnight.

Overnight, in the backdrop of heightened risk aversion, as equities and commodities fell, US and German bonds regained “safe haven” status. The move by the PBOC appears to have unsettled markets as they wonder; is the move part of a desperate attempt to revive China exports, as downside risks to the economy’s growth build; is there more to come; is there potential for the move to delay the US Fed from hiking rates?

US 10-year yields slipped from 2.20% last evening, to as low as 2.11% before returning to trade at 2.13% currently. The intra-night moves have broken below the 200-day moving average, of 2.14%. US 2-year yields have also slipped from 0.72% to 0.67%. German 10-year yields have slipped from 0.68% to 0.63%.

Expect to see some flattening in the NZ curve today. With no domestic data releases scheduled, it will be all eyes on China again this evening, as the latest monthly data dump is delivered. Also look out for a speech tonight by the RBA’s Deputy Governor, which has “Monetary Policy” in its title. 

—————————

Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily swap rates

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