US Fed comments drive a fall in yields. RBNZ reduces their view of the neutral cash rate. Australian inflation miss and RBA comment sees their yields slip

By Doug Steel

Global yields were generally lower ahead of the Fed, with US yields extended declines after the announcement.

US 10-year Treasury yields around currently down 5 bps to 2.285%. Short end yields also fell, as the market questions the resolve of the Fed to hike in December.

Yesterday’s RBNZ speech noted its current estimate for the neutral cash rate is around 3.5%. So the OCR, currently at 1.75%, is clearly stimulatory.

The RBNZ has been factoring in an on-going decline in neutral cash for some time, so the impact on the outlook for interest rates from this assessment of the neutral rate ‘will be modest’.

The market continues to price a first full 25 bp OCR hike by August next year. With the RBNZ unlikely to change the OCR anytime soon, curve direction will continue to be heavily influenced by offshore.

Local yields rose and curves steepened yesterday, reflecting prior session movements offshore rather than any reaction to the RBNZ speech. NZ 10-year swap rose more than 4 bps to close at 3.325%, 5-year swap rose around 2 bps to 2.795% and 2-year eased less than 1 bp to sit just above 2.22%. Yields were higher before gains were pared post the softer AU CPI data and RBA Governor Lowe’s comments, as AU yields declined.

The offshore moves lower will set the tone for local rates today with nothing on the home calendar.

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Doug Steel is a senior economist at BNZ Markets. All its research is available here.