In the US Treasury market, despite the positive economic news, central bank speak and higher equities, rates have only ticked up by just over 1bp across the curve. The 10-year rate has traded in a 2.20-2.24% range and currently sits near the middle of that. Pricing for a mid-June hike has risen to a 90% chance, but beyond that there is much less conviction of another near-term hike, with just 34bps of hikes priced in by year-end.
Yesterday the local rates market saw yet more fresh lows for longer term rates, with 5-year and 10-year swap rates down 3bps to 2.68% and 3.17% respectively, and the 10-year government rate down 4bps to 2.73%. As previously noted, we think that the risks are asymmetrically skewed to the upside for long-term yields on a 1-3 month view.
The focus for the day ahead will be tonight’s US employment report, where the interest lies in whether wage inflation shows signs of picking up. An upside surprise here could rattle the Treasury market, where speculative positioning is net long on 10-year futures. A couple of voting FOMC members will follow the release with speeches, so it is will interesting to see their interpretation of the figures in any Q&A.