By Kymberly Martin
Following the RBNZ’s speech yesterday NZ swaps closed down 3-9bps. Overnight, US yields continued the theme, with 10-year yields declining 6bps to 2.82%.
Yesterday’s speech introduced the long-awaited LVR restrictions for banks. The restrictions were tighter than anticipated by the market with no more than 10% of new loans to have a LVR of over 80%.
The Governor also made specific references to monetary policy describing current inflation as low, and reiterating the mantra that raising the OCR ahead of other major economies could lead to a surge in the NZD. The rates market responded by reining in near-term rate hike expectations. 2-year swap closed down 9bps at 3.43%. The 2s-10s curve steepened to 153bps.
NZ bond yields also declined, though less dramatically than swap as there appears to still be sellers of NZGBs around. Yields closed down 3-6bps, with the yield on NZ 10-year bonds at 4.62%.
The relative moves in swaps and bonds in recent days has seen swap-bond spreads moved down toward the bottom of ranges. We see a 25-60bps range for 10-year swap spreads over the medium-term. 10-year spreads closed at 34bps.
Overnight, in the absence of key data releases European equity markets delivered negative returns as German “safe haven” bonds extended their rally of the past couple of days. German 10-year bonds yields closed down 6bps at 1.84%. US equivalents also closed down 6bps at 2.82%.
Today’s domestic data releases will likely only be of passing interest to markets.
Tonight, all eyes will be on the release of the July US FOMC minutes. The market will be looking for confirmation, or otherwise, that QE ‘tapering’ will start in September. Any signs of reluctance within the committee could see some further pull-back in US yields. Signs from the Fed they are fairly united and committed to pushing forward with QE tapering could see US yields push higher. We continue to forecast US 10-year yields at 3.00% at year-end.
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