By Kymberly Martin
It was a fairly steady day in NZ markets yesterday. Swaps closed up 1-2bps across the curve, and bonds continued their sell-off.
Overnight, global ‘safe haven’ bonds rallied.
NZ 2-year swap closed at 2.98% yesterday, at the upper-end of its well established range.
In our view, 5-year swap, at 3.53%, continues to offer value for hedging over this time frame, even after a 30bps step higher since early May.
Our core view remains one of higher lows and higher highs on swap yields in the year ahead. Dips in yield should be seen as opportunities.
The market prices around a 90% chance of a 25bps hike from the RBNZ in the year ahead. There is not too much on the domestic agenda ahead of next Thursday’s RBNZ meeting to impact on these expectations. There are no domestic data points today. However, the market will likely take its cue from offshore moves this morning.
Yesterday, the RBNZ provided further developments on expanding its macro-prudential tool-kit. It is seeking feedback, by 3 July, on proposals to implement residential LVR (loan to value ratio) restrictions.
The use of such tools will not directly impact on the RBNZ’s need to use its central monetary policy tool, the OCR. However, for now, much market attention and discussion will focus on the development of macro-prudential tools.
Yesterday, AU Q1 GDP came in slightly below consensus expectation (0.6%q/q vs. 0.7% expected). This saw AU swap yields dip as the market increased expectations of future RBA rate cuts. AU 2-year swap closed down around 5bps.
This took the NZ-AU 2-year swap spread to 28bps, its highest level since April 2009. We see higher spreads ahead as the RBA likely cuts again while the RBNZ eventually begins to raise rates.
Overnight, following disappointing European data ‘safe haven’ German and US bonds started to rally. The move was then reinforced by weak US data. US 10-year yields declined from 2.15% to 2.08%, before returning to sit at 2.10% this morning. The AU bond market followed the US keeping AU-US spreads fairly constant.
We would expect NZ long-end yields to open lower this morning, mimicking these offshore moves.
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