by Kymberly Martin

NZ yields closed up across the curve yesterday. Swap spreads widened. The RBA surprised by staying on hold.

NZ swap yields opened up yesterday and then held onto their gains. The yields on 2-year swaps closed up 4bps, at 2.82%. 10-year yields closed up 5bps at 4.13%.

Bond yields also opened up, but then attracted some decent sized bids. Yields closed up just 1 to 3bps. As a result, swap spreads widened, with 10-year swap spreads now at 33bps.

In a move that took the market by surprise, the RBA decided to leave its cash rate at 4.25% yesterday afternoon. As a result, AU short-end swap yields leapt higher. 3-year swap yields jumped from 4.10% to 4.25%, their highest level since early November. This saw the NZ-AU 3-year swap spread fall from -106bps to -126bps. The market now prices less than another three 25bps rate cuts from the RBA, with virtually no chance of a cut at the next meeting. Our NAB colleagues expect only one more cut in May.

AU bond yields also surged higher. The 10-year yield jumped from 3.84% to 3.93% last evening. This saw the NZ-AU 10-year bond spread fall from -7bps to -13bps. Generally, spreads do not stay this negative for long, so we expect NZ long yields to feel upward pressure today.

This will be exacerbated by other moves seen overnight. US and German “safe haven” 10-year yields stepped higher in the early hours of this morning. They both currently trade around 1.96%. NZ-US 10-year spreads are now at the bottom of their range at 183bps.

Expect higher NZ long yields today. Also keep an eye out for the DMO tender announcement for tomorrow.