By Kymberly Martin
It was another fairly quiet day of consolidation domestically as we approach tomorrow’s RBNZ meeting. Both swap and bond yields were little changed.
The market continues to look for a first OCR hike by next March, with more than 75bps of hikes priced for the year ahead. Despite our expectation of 125bps of hikes over the period we do not see an imminent catalyst to push the market toward this view. In fact, with the RBNZ likely to maintain relative reluctance in its tightening bias tomorrow, the current pullback/consolidation in yields is likely to continue.
Currently 2-year and 5-year swaps sit at 3.48% and 4.47% respectively, close to what we calculate as ‘break-even’ levels based on our OCR forecasts. i.e a first 25bps hike next March, with gradual hikes thereafter to a 4.50% peak in 2015.
Today, the Local Government Funding Agency (LGFA) will hold its six-weekly tender. The small volume of shorter-dated bonds on offer will likely be absorbed easily by the market at current yields levels. For the longer maturity ($60m of 2021s) investors may be hoping to opportunistically pick up bonds in the ‘tails’ of the bidding.
Still, with outright yields now at 5.45%, spreads to NZGBs above 90bps, and NZGB yields consolidating, the auction should not face any significant hurdles.
Overnight, in a data-light backdrop, the prospect of a diplomatic alternative to military strikes on Syria calmed market nerves. US 10-year yields traded as high as 2.96% before returning to sit around 2.94% currently.
Today, it should be another fairly subdued day domestically, ahead of tomorrow’s RBNZ meeting.
Tonight, the focus will be on UK labour market data, with only MBA mortgage application data scheduled in the US.
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