Borrowers should not rely on pull-backs in yield being deep or prolonged as higher rates are expected by year-end and beyond

By Kymberly Martin

There was a 3bps decline in yields across the NZ swap curve yesterday. Overnight, US 10-year yields consolidated around 2.60%.

We continue to expect to see pay-side interest in NZ swaps from the ‘real economy’. However, receivers will be drawn back in to take advantage of the compelling ‘carry’ on short-end NZ swaps.

The current dip in yields may extend further, especially if US payrolls were to disappoint at the end of the week, or next Wednesday’s NZ employment report proved soft.

However, we reiterate that borrowers should not rely on pull-backs in yield being deep or prolonged. We continue to see higher yields by year-end and beyond.

The 2-10s swap curve continues to sit around 133bps, within the 110-140bps range we believe will contain it for the remainder of the year. Next year we expect a prolonged flattening to take the curve to a trough around 50bps.

Today, the Local Government Funding Agency, will auction its $10m of LGFA15s and $185m of LGFA21s. This is another chunky tender of longer duration bonds. However, given developments in outright yields, spreads and offshore sentiment since the last tender, we suspect demand dynamics may be more supportive at this event, compared to last.

Overnight, in data-light trading, US and German bonds consolidated. US 10-year yields traded a fairly tight range between 2.57% and 2.61%.

Italian-German bond spreads narrowed slightly, after a well-received tender of €6.75b of Italian sovereign bonds.

Today’s ANZ NZ business survey is likely to tell a now familiar story of buoyancy, unlikely to notably impact on market OCR pricing. All eyes will be on tonight’s US Q2 GDP report and FOMC meeting. Ultimately, we believe Friday’s payrolls report will determine where US long yields (and by association NZ yields) trade by week-end.