By Kymberly Martin
The NZ swap curve flattened a little on Friday. US 10-year yields closed the week lower, at 2.13%.
On Friday, The short-end of the NZ swap curve got a nudge higher after the release of the BNZ PMI that rose further to 59.2, its highest level since June 2004.
2-year swap closed at 3.04%, still a little below mid-February highs close to 3.10%. The market prices close to 40bps of RBNZ rate hikes in the year ahead.
We expect a first 25bps hike in March followed by a further hike in June and steady progression thereafter. We see the OCR at 4.50% in mid-2015.
The market still under-estimates this process, in our view. Current market pricing is consistent with and OCR only around 3.50% by mid-2015.
The longer-end of the NZ swap curve closed down 2-4bps, resulting in a flattening of the 2-10s curve to 115bps. We continue to see the curve entrenched in a 95-125bps range until a prolonged flattening unfolds through 2014.
NZ bond yields closed down 1-2bps on Friday. 10-year bond yields are now almost 60bps off their early May lows. This Thursday’s DMO auction of $120m of nominal bonds (the first since 30 May) will provide an important barometer of current demand for NZGBs.
Overnight on Friday, markets appeared a bit tired. While European equities consolidated, ‘safe haven’ US and German 10-year bond yields drifted lower to close the week at 2.13% and 1.51% respectively.
All eyes will now be on the meeting of the US Federal Reserve (early Thurs morning NZT). It is a few weeks now since Chairman Bernanke’s comments that ‘tapering’ of the Fed’s asset purchases could begin in the next few meetings.
These comments spurred a broad sell-off in ‘risky assets’. The market is likely now looking for the Chairman to calm some frayed nerves, emphasising that any talk of ‘tapering’, falls well short of rate ‘tightening’ that remains unlikely until well into 2015.
Tonight, EU employment data, US Empire Manufacturing index and NAHB house price data will be released.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.