By Kymberly Martin

NZ swap yields closed down 1-3bps across the curve yesterday. As the market now focuses on next Thursday’s RBNZ meeting, it continues to price around a 15% chance of a rate cut by mid-year.

But it also assigns a 20% chance of the OCR being 25bps higher by year-end. We believe the Bank will try to play a very straight bat at the meeting with no intention of influencing market pricing.

We see even-sided risks to swap yields at present, as they continue to sit at the upper-end of well-established ranges.

Yesterday’s bond tender attracted plenty of bidders, perhaps spurred on by the large tail seen in last week’s tender. Still, it did not represent true strong demand, as bonds were sold below mid-market price at the time.

In addition, the NZGB 23s had a 4bps range of successful bids.

We continue to expect weakness in NZ bonds compared to AU equivalents and NZ swap, until relative value is more compelling.

Overnight, data on either side of the Atlantic failed to provide markets with significant surprises.

US 10-year bond yields popped a little higher on better-than-expected weekly jobless claims numbers (remembering improvement in the US labour market is the primary indicator for the Fed to reign in ultra-loose monetary policy).

US 10-year yields sit around 1.85% at present, still well within ranges.