By Kymberly Martin
NZ swap yields closed little changed yesterday. Overnight, US benchmark 10-year yields crept a little lower to trade around 2.62% currently.
NZ 2 and 5-year swaps closed at 3.43% and 4.39% respectively. The market prices around a 75% chance of a 25bps OCR hike by next March, and around 75bps of hikes in the year ahead. This falls someway short of our expectation for 125bps of hikes over the period. However, in the near-term we see little in the way of catalysts to reverse the gentle drift lower in yields.
That said, 2-year and 5-year swap are now around 15bps below their mid-September highs. Below 3.40%, we see “value” starting to re-appear in 2-year swap and would expect to see pay-side demand returning.
The 2-10s swap curve has flattened from above 160bps to 150bps since early September. The long-end of the NZ curve continues to be significantly influenced by US long yields.
In this regard, we believe the attention of US rates markets will moved from Fed policy to fiscal policy in coming weeks. Moving into October we have the possibility of US government shutdown if US budget negotiations are not successful and/or the US ‘debt ceiling’ is unable to be raised.
With reference to previous events an eventual solution to these issues will likely be wrung out at the last moment. In the interim however, expect market volatility. While these issues remain unresolved it is also more likely that US 10-year yields trade sub 2.50% than trade back at their 3.0% peak (even accounting for event risk at next Friday’s US payrolls).
Last night, US 10-year yields traded lower, from 2.66% to sit around 2.62% this morning. US home sales for August came in slightly above expectations at 7.9%m/m (6.6% expected). The rebound from the July dip may help to calm some fears that the surge in interest rates since May has choked off the housing recovery. Tonight, there are further US housing indicators with August pending home sales data delivered.
There is little scheduled on the domestic data agenda ahead of Monday’s ANZ business confidence survey.
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