US yield curve flattest in 10 years, distorted by QE durations. Soft AU GDP pushes back next RBA rise. Eyes now on US non-farm payrolls report

By Jason Wong

At the risk of sounding like a broken down record, the US yield curve continues to flatten, with the 2-year rate down 1 bp to 1.81% and the 10-year rate down 2.32%.

The 51 bps spread is the narrowest in 10-years.

While some are worried that this is a leading indicator of weaker growth ahead, I’d be hesitant in jumping to that conclusion.  The long end of the market continues to be distorted by bloated central bank balance sheets.  It makes no sense to me why the ECB is still buying European bonds every week, adding to the distortion. 

Germany’s 10-year rate slipped below 0.3% to its lowest level since June at a time when CPI inflation is running at 1.8%.

Local rates were lower yesterday, with lower Australian rates, following the soft GDP figures a key influence, alongside the drift down in US rates. 

Pricing for RBA rate hikes continues to be pushed out, with the first hike now not fully priced until well into 2019. 

Pricing for the first RBNZ hike remains February 2019.

The 2-year swap rate fell by 1 bp to 2.16% while the 10-year rate fell by 5 bps to 3.08%, fully unwinding the upward move earlier this week.  The recent move down by swap rates provides another opportunity for corporates to pay fixed rates and lock in some hedging before the end of the year.

The economic calendar is light for the day ahead, and trading conditions are likely to remain subdued until the US employment report.

Daily swap rates

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

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