By Kymberly Martin
NZ swaps closed up 4-5bps and NZ bond yields up 6-7bps. Overnight US 10-years consolidated around the 1.80% level.
The market showed a fairly muted response to the positive surprise in yesterday’s Household Labour Force Survey.
This notoriously volatile series showed the unemployment rate drop to 6.2% (the lowest in 3 years). More importantly, trends now clearly show rising employment and falling unemployment.
The market still looks for the RBNZ to be inactive for the rest of the year, with around a 20% chance of a hike by a year’s time.
In the market’s current state of apparent lethargy we think it may still be some time before there is a catalyst to push market pricing much higher.
However, we continue to expect a first RBNZ hike in March 2014 and higher yields by year-end. For example, we forecast 2-year swap at 3.40% by year-end (currently 2.84%).
The 2-10s swap curve remains around 102bps. We look for it to keep steepening in the near-term, to above 115bps.
NZ bonds sold off 6-7bps across the curve yesterday. However, NZ 10-year bond yields still sit within 10bps of all-time lows.
We think long-end NZ bonds remain expensive on an outright and relative basis.
Across the Tasman, AU yields lurched higher after the stronger-than-expected employment report. 3-year swaps jumped from 2.89% to 2.95%.
However, NZ-AU 2-year swap spreads remain around 13bps. We continue to expect further widening, with an initial target of 25bps.
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