By Kymberly Martin
NZ swap yields closed down a further 4-5bps across the curve on Friday, following the previous day’s decline in US yields. US 10-year yield closed the week at 2.49%.
NZ 2-year swap closed on Friday at 3.17%, having spent the past week consolidating around the 3.20% level.
The market now prices around 50bps of RBNZ hikes in the coming 12 months and around 135bps of hikes over the next two years.
We continue to look for 200bps of hikes over this period, but for now think market expectations will consolidate around current levels.
There is little on the domestic data agenda this week likely to impact on Official Cash Rate (OCR) expectations.
NZ 10-year swap has pulled back about 15bps from its recent highs, mimicking moves in US Treasury yields. The NZ 2-10s swap curve closed the week at 132bps.
NZ bond yields also closed a little lower on the week. The the yield on NZGB23s was at 4.13%, and 10-year swap spreads at 36bps.
We believe the 30bps narrowing in these spreads since early May is entirely justified. However, we would now be looking toward 30bps as a level to position for tactical widening of 10-year swap spreads.
There is plenty to influence US yields this week. Tonight the US ISM manufacturing survey is published and is expected to claw its way back into expansion (above 50) after a 49.0 reading in May.
On Wednesday, the market will focus on the ADP employment report as a precursor to Friday’s all-important non-farm payrolls report. The market is looking for 165K in June after 175K in May.
Any disappointment would likely see the current pull-back in US long-yields extend. Any positive surprise would likely see June highs on yields re-tested.
It is also a busy week for rates markets across the Tasman. Heading into tomorrow’s RBA rate decision, the market prices a 20% chance of a cut at the meeting. It also prices around 30bps of rate cuts in the year ahead.
We do not expect a cut tomorrow, but suspect a further 25bps cut may be necessary by year-end.
Consistent with this view, and our view that the RBNZ will tighten from early next year we see continued widening of NZ-AU swap spreads. We see NZ-AU 2-year spreads moving beyond 50bps (currently 35bps).
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