UST yields push higher on Fed hike talk. Too much easing priced in to AU rates. NZ curves flatten

By Raiko Shareef

NZ interest rates drifted lower yesterday, with local investors eyeing Thursday’s RBNZ meeting.

Overnight, US Treasury yields rose modestly.

It was a quiet day in local rates markets, with investors relatively set in their positions ahead of the July OCR Review. Some receiving activity at the long end of the curve dragged rates lower.

The 2-year swap yield dipped by 1 bp to 2.86%, and the 2s10s curve flattened by 3 bps to 88 bps.

US Treasury yields pushed higher, led by the short-end of the curve. Some of that may be attributable to further alleviation of global risks, after Greece made a series of payments to creditors. But we suspect it had more to do with a growing feeling among investors that the Fed could well start raising the Fed Funds Rate in September.

In an interview last night, St Louis Fed Governor Bullard said that there’s more than a 50% chance of a rate rise at that meeting. The market prices just a 20% chance.

While Bullard does not vote on policy this year (but will in 2016), he is considered an ‘activist’, and a gauge of which way the FOMC majority is leaning.

Today, rates market will be paying close attention to the RBA’s July minutes, on the off chance they provide some direction. While the RBA will likely keep the door open to further easing, our NAB colleagues believe too much easing is priced into the Australian rates curve (around 18 bps at present). They see ‘fair’ pricing at between zero and 12 bps worth of easing.

—————————

Raiko Shareef is on the BNZ Research team. All its research is available here.

Daily swap rates

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