No stimulus from Fed and RBNZ, but Treasury yields drop

As you all know by now both central banks in US and New Zealand territory have maintained status quo in their monetary policy decision, fed’s funds rate at 0.50% and RBNZ’s OCR at 2.25%.

But, there were both dovish and hawkish tweaks from both Fed and RBNZ, but beyond the usual knee-jerk volatility the US dollar is unchanged. The AUD continued to reel from its CPI data shock, and the NZD was sold ahead of the RBNZ.

The next Fed hike is fully priced for Feb 2017, with June 2016 still given around a 20% chance.

US treasury yields declined after the Fed statement noted slowing economic activity and no longer mentioned inflation picking up.

The US 10Y treasury yield slid from 1.91% to 1.88% as FOMC maintains status quo, and further to 1.85% post-announcement.

The 2Y was more restrained, ranging between 0.84% and 0.85% pre-FOMC and slipping to 0.83% afterwards.

Having risen above 1.90%, the 10yr treasury yield fell to 1.81%, but it edged higher following the Bank of Japan announcement of no policy easing.

The fall in US yields will probably follow through to the bund and gilt markets today. Bund yields could be weighed further if German inflation surprises on the downside.

Although markets have fully priced in a 2.0% OCR, they are aware the risks for the RBNZ are mainly to the downside and see potential for the OCR to fall below 2.0% if global shocks materialise.

The 2yr should drift towards 2.20%, while the 10yr will be driven more by Fed behaviour and should trade around 3.00%. The curve should steepen.

With 10-year swap rates close to record lows, it is difficult to argue that fixing now does not offer good value from an historical perspective. However, rates could move lower still, especially for tenors out to 5 years.