by Kymberly Martin

NZ swap yields broke beyond ranges yesterday, closing up 10-15bps. Bond yields also got dragged up 9bps.

NZ swap yields had a decent leg up yesterday from the open. 2-year yields moved quickly from 2.96% to 3.05% before finding a point of liquidity. They closed at 3.06%, their highest level since early November, with the next resistance level now at 3.20%.

A combination of better NZ data recently, improving global risk appetite, and an RBA that failed to meet market expectations for a rate cut, has seen the market push expectations for RBNZ rate hikes higher.

The market now prices 25bps of hikes in the coming year. We expect 75bps, so ultimately yields have further to rise, in our view.

Today’s RBNZ 2-year-ahead inflations expectations number could give the market further excuse to push yields higher. We expect the reading to nudge down only a tad from the elevated 2.8% November reading.

There were significant moves in the swaps mid curve also, with 5-year yields rising 15bps to 3.78%. Resistance is now seen at the 4.0% level. NZ swap yields have also risen relative to AU equivalents. The NZ-AU 3-year swap spread moved from -122bps to -112bps.

Moves in bonds were slightly less dramatic, though the curve still moved up around 9bps.The yield on NZGB 21s closed at 4.10%. US bonds were not trading overnight due to a US holiday. NZ-US 10-year bond spreads have therefore broken higher to 210bps, their highest level since November. If NZ yields can maintain upward momentum, independent of contained US yields, the next trading range is 225bps-260bps. We see NZ-US 10-year bond spreads peaking in this range in H2 this year.

Expect upward pressure on NZ yields again today given generally positive sentiment overnight, and solid equity market performance. This could be exacerbated by a stubbornly high inflations expectations reading today