by Kymberly Martin

After further rises in NZ yields they tested resistance levels. Curves steepened. Overnight, “safe haven” yields rose.

NZ swap yields rose by a further 8bps at the long-end yesterday. 10-year closed at 4.33%, with the 2s-10s curve back at 143bps its highest level since early December.

We expect steepening pressure to continue for a while, as rising long yields offshore, drag NZ yields higher. 5-year swap yields have broken higher, closing at 3.53%. Technical resistance is now eyed at 3.60%.

2-year swap yields are re-testing resistance levels, closing at 2.91%. If sustained, this opens the way for a rise to 3.20%. The market now prices around 9bps of rate hikes from the RBNZ in the coming year. We expect 75bps.

Across the Tasman, AU yields continue their rapid ascent. The market has ratcheted up their RBA expectations even further. It now prices only 53bps of rate cuts in the year ahead. We expect one more 25bps cut, at most. AU 3-year swap yields rose from 4.29% to 4.42% yesterday. This took the NZ-AU 3-year swap spread to -133bps, its lowest level since July 2011.

The DMO auction attracted decent interest, with a 2x bid-to-cover ratio. It went 1.5bps below mid-price at the time. However, the drop in bond yields was curtailed by rising AU yields and rising NZ swaps. The yields on NZGB21s closed at 4.10%. We expect further rises in long-end bond yields, especially given swap yields are now significantly higher than bonds of similar maturities.

Overnight, 10-year US and German “safe haven” bonds lost some appeal. Yields rose to 2.07% and 2.02% respectively. US yields are now testing the top of their range, since November.

In the day ahead look out for the RBA statement on monetary policy.

At the margin, any hints of a more hawkish tone, could also nudge NZ expectations for rate hikes higher. This could see NZ short-rates a little higher. NZ long-end yields are expected to continue their march higher today, after offshore moves overnight.