by Mike Jones
NZ swap and bond yields subsided a little on Friday. Still, last week’s theme was clearly one of higher yields and a steeper curve.
NZ 2-year swap yields closed off 3bps on Friday, at 3.09%, up 5bps on the week. The market now prices 30bps of rate hikes from the RBNZ in the year ahead. We expect 50bps.
The more significant moves last week came at the long-end, with the 10-year swap yield finishing the week up 16bps. As a result, the 2-10s curve steepened from 135bps to 146bps over the week. We believe the curve is still biased to steepen, given we see the fundamental “fair” level around 160bp. In the immediate-term, expect consolidation around current levels, ahead of any further up-leg for US long yields.
Bond yields also eased off slightly on Friday. The yield on NZGB13s ended the week unchanged. That on NZGB21s closed up 9bps. However, at 4.20% the yield on 21s trades at the lower end of its ranges relative to both its AU and US equivalents. On a relative basis, we therefore see upside to NZ long bond yields.
On Friday night, US 10-year yields continued to creep higher, touching above 2.36% before the release of the March University of Michigan consumer confidence survey. This came in at 74.3 (76.0 expected), slightly below the previous month’s reading. US 10-year yields then eased lower to close just below 2.30%. They were up almost 30bps on the week.
A continuation of positive data surprises, or hawkish “Fed speak” will be required this week to push US yields to the next level.
It is actually rather quiet on the US data front this week, except for housing data on Tuesday and Wednesday and weekly jobless claims on Thursday. However, there is a plethora of Federal Reserve representatives speaking.
Given last week’s sharp moves expect some consolidation in NZ yields this week, as the market waits for cues from the US market.
The most important local release will be Thursday’s Q4 GDP release. An outcome in line with our expectations of 0.7%q/q (market 0.6%q/q) may be enough to nudge market expectations higher for RBNZ activity in the year ahead.
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