by Kymberly Martin

NZ swap yields closed up 6-8bps on Friday. Bond yields also rose.

NZ swap yields rose across the curve on Friday, with a slight steepening bias. Most of the move came via pay side interest at the short-end.

2-year saw good liquidity and closed at its high of 2.96%. This takes it back to its recent high, and opens the way for a break higher to the next resistance level at 3.20%. 5-year yields broke above the 3.60%, closing at 3.63%. Technical resistance may now be as high as the 4.0% level. The market prices 15bps of rate hikes from the RBNZ in the year ahead. We expect this pricing to gradually rise. Tuesday’s RBNZ survey of 2-year-ahead inflation expectations could provide a catalyst, if it remains stubbornly up around 2.8%.

NZ bond yields closed up around 4bps across the curve. The yield on 21s closed at 4.01%, at the top of recent ranges. The NZ-US 10-year spread is still quite wide at just over 200bps. This suggests further upside to NZ long bonds will require US bonds to convincingly break above the 2.0% level. On Friday night they traded as high as 2.03% before returning to trade at 2.0%.

Ongoing uncertainty in Greek negotiations is maintaining demand for “safe haven” US and German long bonds. US Federal Reserve purchases are also holding down US long yields, suggesting it will be heavy work for US long yields to rise meaningfully. This will keep NZ long yields lower than otherwise dictated by domestic fundamentals.

Aside from tomorrow’s inflations expectations data, local data is of general 2nd tier importance this week. Expect NZ yields to take their cue from offshore, with a bias to yields inching higher.