Negative sentiment following Fonterra’s contamination announcement likely to exert downward pressure on NZ yields

By Kymberly Martin

On Friday, NZ yields followed the previous night’s moves higher. NZ swaps closed up 6-9bps while NZGBs closed up 8bps across the curve.

There was a decent rise in NZ swap yields from the open on Friday.  2-year and 5-year swap closed at their highs for the year, at 3.39% and 4.20% respectively.

The 2-10s curve closed slightly steeper at 133bps. Our end of year targets for 2 and 10-year swap remain at 3.60% and 4.80% respectively, though risks are likely to the upside.

NZ bonds continued to sell off and for now the long-end of the curve looks reasonably attractive relative to AU and US equivalents. However, there is a lack of genuine buying interest being seen.

Next year, as RBNZ rate hikes get underway we see NZ-AU and NZ-US 10-year bond spreads widening from current levels.

On Friday night, US 10-year yields held crept to the top of their recent range, to 2.74%, ahead of the US payrolls data. After the data disappointed (162k vs. 185k expected) yields gapped to around 2.62%. They dribbled lower to close at 2.60%, once again mid-range. The move was mimicked by Aussie bond futures.

Therefore expect NZ yields to open a chunk lower this morning, with a flattening bias to the curve.

Negative sentiment, after Fonterra’s weekend announcement of contamination at one if its production plants, will also likely exert downward pressure on NZ yields.  However, assuming the issue proves contained, we do not see any fundamental impact on the OCR outlook over the medium-term.

It will be an important week for rates markets locally. Tuesday brings the RBA meeting. A 25bps cut is now 90% priced.  We expect a cut, with at least one more cut later in the year, taking the RBA cash rate below the RBNZ’s. The key focus for NZ markets will be Wednesday’s employment report, which will then be followed by AU’s equivalent on Thursday.