BNZ expect longer dated swap rates to climb even higher

by Kymberly Martin

NZ swap yields pushed a lot higher again yesterday, with the curve steeper. Bond yields showed similar moves. Overnight, US 10-year yields consolidated their gains.

As expected, NZ long-end swap yield followed the break higher in US long bond yields. 5 to 10-year swaps closed up 11-12bps, with the 5-year and 10-year yield at 3.87% and 4.59% respectively. These have both now broken out of recent ranges and we believe this rise may have further to run.

Meanwhile the short-end is more constrained, though market expectations for RBNZ rate hikes in the year ahead have been ratcheted up to 30bps. 2-year swap yields closed at 3.12%, the top of recent ranges, after a failed attempt to break higher during the day. The 2s-10s swap curve is now at 147bps, its highest closing level since early December. We continue to believe “fair” on this curve, based on fundamentals, is around 160bps.

The decently sized (400m) DMO bond tender attracted modest demand at 1.27x bid-cover ratio. Bonds had sold off notably ahead of the tenders, and yields managed to stabilise after the results. The yield on NZGB21s closed up 14bps at 4.22%, its highest close since mid November.

With a strong rise in AU yields also in recent days, the NZ-AU 10-year spread has slipped toward the bottom of its range at -6bps. There is therefore room for NZ bonds yields to rise relative to their AU counterparts.

Similarly, NZ - US spreads have bounced off their lows to 193bps but still have meaningful upside.

Overnight, US 10 - year yields consolidated their recent surge higher. They traded as high as 2.34%, before returning to trade around 2.27% currently.

Expect NZ yields to consolidate their gains today. A curve steepening bias should remain. There are no NZ data releases so global sentiment will remain the key driver.