By Kymberly Martin
It was a quiet end to the week in NZ markets. NZ swaps and bond yields closed up 1-2bps. US 10-year yields consolidated just below 2.75% on Friday night.
NZ 2-year swap closed the week at 3.48%, around 10bps below its cyclical highs earlier in the week. We would not expect the pullback to extend much further. If yields were to reach 3.40% this would start to represent ‘value’ for hedging relative to our OCR expectations for the coming two years.
We continue to anticipate a first 25bps hike in March next year from an historic low in the OCR of 2.50%. We see the OCR 200bps higher, at 4.50%, by mid-2015. The market currently prices around an 85% chance of an OCR hike by March next year and around 180bps of hikes in the coming two years.
NZ 10-year bond yields, at 4.72%, also sit around 10bps below last week’s highs. Still, the yield on these benchmark bonds is higher than for all its peers except for those of Portugal and Greece. Spreads to US and AU equivalents appear fairly attractive at 207bps and 78bps respectively.
On Friday night, in the absence of key data releases US 10-year bonds appeared content to consolidate around recent levels. Some brief volatility ensued around comments by Fed speaker Bullard. Yields only briefly punctured 2.77% before ending the week at 2.73%, some 27bps below early September highs.
It is a very light data week ahead on both sides of the Tasman. Market direction will therefore be largely influenced by offshore events.
There is a rash of US Fed speakers out this week, all likely to offer their nuanced view of what the Fed is up to. The market may also watch this week’s array of US housing indicators closely. The Fed is scrutinising the housing market for signs the recent rise in yields has stymied its recovery.
For today, broad market sentiment will likely be established by the release of the China flash PMI, followed by similar releases in Eurozone and the US tonight.
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