By Kymberly Martin
A similar theme continued yesterday, with NZ yields following their offshore counterparts lower.
NZ swaps closed down a further 2-6bps while the curve flattened.
At 3.39%, 2-year swap is now 15bps below its mid-August peak. 5-year swap, at 4.33%, sits around 13bps below its recent peak.
In recent weeks as the market has inched down its expectations for RBNZ rate hikes, across the Tasman the market has reduced expectations for further RBA rate cuts.
This has seen the NZ-AU 2-year swap spread pull back from around 83bps to sit at 62bps currently.
However, our central view has not changed.
We expect a first RBNZ hike in March next year with a steady rise in the OCR thereafter.
We see a further RBA cut later this/early next year.
On this basis, ultimately later this year we see spreads beginning to widen again, taking the NZ-AU 2-year spread to a peak around 120bps next year.
We are starting to see tentative buying interest in NZGBs, though this is certainly not yet widespread. We prefer to buy NZGB23s relative to US counterparts, as this week we reached top of ranges close to 200bps.
We look for spreads to narrow toward 170bps.
Overnight, a sense of calm prevailed in markets, despite the prospect of military strikes on Syria. US 10-year yields rose from 2.70%, ignoring mixed US housing data, to sit at 2.78% this morning.
Overnight, Mark Carney made his first scheduled speech as BoE Governor. He indicated that he would be willing to follow the increasingly popular route of using ‘new tools’ other than the cash target rate. His comments echoed the RBNZ’s. He sees risks of an inflated housing market, but does not want to raise interest rates for fear of stifling growth elsewhere in the economy.
Today, attention should return to the domestic economy with the release of the ANZ business survey. We expect, this combined with offshore moves overnight, will see NZ yields bounce from their recent pull-back.
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