by Kymberly Martin
NZ swap yields ended the week at new highs since November. Offshore “safe haven” yields remain in ranges.
NZ swap yields, that have been on a strong upward run since the start of the month, pulled back mid last week, before finishing the week at new highs. On Friday, swap yields were up 6bps across the curve, led by a spurt of pay-side interest in the short-end. At one point, 2-year yields traded as high as 3.11%, before closing at 3.09%.
We are starting to see some flows from businesses, keen to hedge balance sheet risk. Next technical resistance for 2-year swap yields is 3.20%. At present, the market prices around 25bs of RBNZ hikes in the year ahead. We expect up to 75bps of hikes in the coming year. We therefore continue to believe the bias is toward higher swap yields, with dips unlikely to revisit old lows. The swap curve remains quite stable just over 140bps.
NZ bond markets were quiet on Friday, though yields ended the week a little higher. The yield on NZGB21s closed around 4.14%, their highest close since early November.
Overnight on Friday, “safe haven” US and German 10-year yields continued to languish at 1.98% and 1.88% respectively. Despite notable improvement in US economic data in recent months, this is not being reflected in higher US long yields. They fail to break above 2.10%. This suggests that Fed purchase of US long bonds is being “successful” in keeping yields low.
While this will keep NZ long yields lower than otherwise would be the case, we believe it will not prevent them moving higher. NZ-US 10-year bond yields have moved up to 216bps, convincingly breaking out of previous ranges. We now see resistance at 240bps.
Wednesday’s NBNZ business survey will be the key local release this week. This will be the most substantial assessment of the pulse of NZ business this year. We expect results to be consistent with GDP growth running at trend, at least. A strong reading could provide the next leg up for NZ swap yields. The greatest downside risk to yields this week comes from any negative developments in Europe, which would cause the market to revise down expectations for RBNZ rate hikes in the year ahead.
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