By Kymberly Martin
In another fairly quiet day of trading, NZ swap yields managed to close up 3bps while bond yields were up 3-8bps.
NZ 2 and 5-year swaps closed at 3.51% and 4.50% respectively, once again moving back toward their highs for this cycle.
The market is pricing a 25bps rate hike by March next year, and around 80bps of hikes for the year ahead. This is consistent with our own view of a first hike in March but falls short of our expectation for 125bps of hikes by this time next year.
However, in the near-term we see the greater prospect of the market pulling back expectations that are now quite aggressive on a global basis. Certainly at today’s meeting we expect the RBNZ will try to avoid saying anything to further boost market pricing.
The 2-10s swap curve, at 159bps, remains steep but is almost entirely beholden to moves in US long yields at present. Over the longer-term we expect the curve to flatten to 60bps next year as OCR hikes get underway.
Overnight, US benchmark 10-year yields dipped from around 2.97% to 2.91% currently. This followed an auction of US$21b of 10-year bonds that attracted strong demand. The bonds yielded 2.95% compared to expectations for 2.97% and the bid-to-cover ratio was a healthy 2.86x.
In US credit markets, Verison sold US$49b of bonds in the biggest ever corporate sale of debt. Both of these events show demand for debt remains solid in the approach to next week’s US FOMC meeting. Expectations for QE ‘tapering’ are likely now largely ‘in the price’.
Returning to NZ, yesterday’s Local Government Funding Agency (LGFA) tender once again attracted fairly tepid demand. This resulted in spreads to NZGBs being marked wider. Bid to cover ratios ranged from 1.6x to 3.0x. Successful bid ranges remained fairly wide at 3-10bps.
Today, the domestic focus will be the RBNZ meeting at 9.00am. Across the Tasman the focus will be the AU employment data. Tonight, there is little data-flow in the US except weekly jobless claims.
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