US Fed's Dudley wants to see more data before making judgement on rate hikes; US treasuries continue sell-off; NZ swap curve continues to steepen following global lead

By Kymberly Martin

There was a modest steepening of the NZ swap curve yesterday. Overnight, US 10-year yields pushed up from 2.07% to 2.17%.

Overall there was not much movement in NZ swap and bond markets yesterday despite the volatility in offshore markets.

By the end of the day, NZ 2-year swap had closed down 1bps, at 2.82%, its lowest level since early-May 2013.

The market prices that the OCR will be cut to 2.50% by mid next year.

Our central view sees 2.50% being achieved sooner, with a 25bps cut at the Sept 10 meeting, most likely a followed by a cut at the Oct meeting.

Overnight, there appeared to be a number of events that impacted on US yields.

Yields had been drifting higher last evening. They pushed up further after the release of the stronger than expected US durable and capital goods orders.

Yields then endured some choppiness around comments from US Fed’s Dudley in the early hours of the morning. His comments were open to interpretation. 

It was widely reported that Dudley said that a decision on a Sept “lift-off is less compelling”. We would concur. He would like to see some more data before making a judgement.

However, it’s still plausible a strong early-Sept US payrolls report could tip the balance toward a hike. Dudley said it was important not to overreact to global market turmoil.

He emphasised it would take a “large and prolonged” drop in equities before it would have implications for the US outlook.

Finally, later this morning, after an auction of US 5-year bonds that was solid rather than stellar, USTs resumed their sell-off. US 10-year yields trade at 2.17% this morning.

In the absence of domestic data, the overnight moves, mimicked by AU bond futures, could see some steepening pressure on the NZ curve today.


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

Daily swap rates

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