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Stronger-than-expected US nonfarm payrolls pushes US 10-year bond yields up to 1.74%; Equivalent German bond yields also higher

Bonds
Stronger-than-expected US nonfarm payrolls pushes US 10-year bond yields up to 1.74%; Equivalent German bond yields also higher

By Kymberly Martin

Short-end NZ swaps closed little changed on Friday as the market prices under a 20% chance of a rate hike from the RBNZ in the year ahead.

Long-end swaps closed down 3bps, flattening the 2s-10s curve to 94bps, just below the level we have highlighted to position for steepening.

We expect the curve to steepen from the bottom of its 95-125bps range, especially given the moves offshore on Friday night.

After stronger-than-expected US nonfarm payrolls on Friday, US 10-year bond yields lurched from 1.62% to close the week at 1.74%. Equivalent German yields also jumped from 1.18% to close the week at 1.24%.

Peripheral European spreads narrowed a little further. For example, Spanish-German 10-year spreads closed the week at their lowest level since August 2011.

NZ 10-year bond yields closed around their lows at 3.15% last week. We maintain our view that long-end NZGBs are ‘expensive’ at these levels on an outright basis and on spread to swap and offshore counterparts.

Near-term supply constraint is partly responsible, though we believe this will ease as we approach fiscal year June 2013/2014.

Today, we would expect NZ long-end bond and swap yields to open higher after the moves seen on Friday night, also reflected in Aussie futures.

Domestic highlights this week will be Thursday’s Household Labour Force Survey and Wednesday’s RBNZ Financial Stability Report. The latter may gain more attention than its usual passing nod, given some likely discussion of proposed new macro-prudential tools.

The HLFS is notoriously volatile but is more likely to show a decline in the unemployment rate in our view (to 6.7%, from 6.9% previously).

It will also be a busy week across the Tasman with AU retail sales data today, preceding tomorrow’s RBA target announcement, and Thursday’s employment data.

The market prices around a 55% chance of a RBA cut tomorrow. Non-delivery would likely see the market push out its expectation for a cut, to June (our NAB colleagues’ central view)

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