On little news, global bond yields have nudged up a bit overnight retracing some of the recent trend down.
The US 10-year Treasury rate is up 4 bps at 1.55%, the high of the session so far.
Blackrock, one of the world’s largest institutional investors, said it was reducing its exposure to long-dated US Treasuries, as increased hedging costs from Japan and Europe reduced their appeal to some foreign investors. The yield to maturity for a Japanese or European based investor wanting to fully hedge the USD currency exposure has recently moved to zero or negative.
San Francisco Fed President Williams (non-voter) published a thoughtful essay on the future of central banking. He argued that a “new normal” had developed and urged central bankers to consider abandoning the practice of targeting low inflation – either set a higher inflation goal or look at other options such as flexible price-level targeting or a nominal GDP target. He suggested putting more onus on fiscal policy as a tool for managing the economic cycle.
Local trading activity was quiet yesterday. The rally in US Treasuries on Friday night imparted a downward bias to yields. The 2-year swap rate fell by 1 bp to 1.95%, while the 10-year rate fell by 4 bps to 2.38%, both being record low closes. We expect the record-breaking to continue, with the 2-year rate trading down below 1.90% in coming months as the market builds in further easing potential from the RBNZ. The longer end of the curve might find the going a little tougher. Some weariness in taking global bond yields much lower could well be setting in and this dynamic would feed into NZ rates.
Today’s RBA minutes should pass without too much market interest, as the publication of the Statement on Monetary Policy subsequent to the meeting provided enough detail. US CPI data is the key global release overnight. Markets are still sceptical that the Fed will tighten policy again this year. Speculative positioning data suggests that the market is long Treasuries, so a much stronger than expected result would be more shocking that a soft result.