By Kymberly Martin

NZ swaps closed down 2-3bps across the curve yesterday. US long yields consolidated further overnight.

Yesterday, on the back of the lower-than-expected AU Q4 CPI reading, AU swap yields fell by around 6bps. The 2.2%y/y CPI outcome is close to the bottom of the RBA’s 2-3% inflation target range.

The market has increased its pricing for a cut at the RBA’s Feb meeting to 40%. We now believe the market is under-pricing the risk of a cut in February that our NAB colleagues see around 50%.

Despite the slump in AU yields, NZ equivalents held up relatively well. There is pay-side interest at the short-end of the NZ swap curve.

We think there may be some mortgage flow coming to market or being pre-positioned for. This may be in response to recent retail campaigns targeting low 2-year fixed mortgages.

2-year swap yields, at 2.81%, remain at the upper end of ranges.

NZ bond yields closed up 3bps across the curve, narrowing swap-bond spreads.

Today’s DMO tender of $100m of NZGB 17s and $100m of NZGB 23s will be watched with interest, after the lukewarm reception at last week’s auction. We continue to believe NZ bonds are expensive on a number of relative metrics.

Overnight, the Bank of Canada left its cash rate at 1.0% and reiterated much of its previous statement, saying “over time some modest withdrawal of monetary policy stimulus will likely be required”. However, higher interest rates were now seen as “less imminent”. Canada is one of the few key central banks globally, that like the RBNZ, maintains a tightening bias.

In the lead up to next Thursday’s RBNZ meeting, today’s BNZ PMI is the next part of the data jigsaw.

We expect an improvement from the November reading of 48.8. But, even a return to expansion (above 50) is unlikely to be a sufficient catalyst to boost NZ swap yields out of ranges established over the past 8 months. The catalyst will likely need to be more direct indications from the RBNZ that rate hikes are imminent. We suspect we may be still some way from this.