Expectation of easier monetary policy sees NZ 2-year swap rate fall further; implied US break even inflation rate gets attention; upside bias to global bond yields

By Jason Wong

There’s a modest upside bias to global and US rates, with the US 10-year Treasury up 4bps to 1.91%. 

Getting the market’s attention is the pop up in implied break-even inflation from the TIPS market. 

The US 10-year break-even inflation rate is up 5bps to 1.67%, the highest since August. Five weeks ago, the BEI was 1.20%. 

Rising oil prices and, more recently, a sign that the Fed has gone soft on inflation, has led to rising long-term inflation expectations implied by market pricing. 

If this trend continues, then the US 10-year rate is likely to revisit the 2% mark, even with the Fed seemingly on hold for now.

NZ’s yield curve steepened yesterday, with global forces supporting a 1bp lift in the 10-year swap rate to 3.03%, while expectations of easier NZ monetary policy helped nudge the 2-year rate down a point to 2.23%, a fresh historical low.  

We see a greater chance than the market is currently predicting for an April OCR cut (currently 38%) and potential for the 2-year swap rate to trade down to 2% in coming weeks/months as the market moves to price in a lower end-point for the OCR.

Trading is expected to remain light this shortened Easter week, with little data to drive markets.