By Kymberly Martin
NZ yields closed down a further 2-3bps yesterday. Overnight, US benchmark 10-year yields continued to flat-line just above 2.50%.
The catalysts for the pull-back in NZ yields over the past few weeks appear to be both global and domestic.
First, since September, as the market has pushed back its expectations for US QE ‘tapering’ into next year, US Treasuries have led a global pull-back in yields. Second, domestically, recent implementation of LVR restriction on banks and subsequent discussion of their impact has caused the market to question the RBNZ’s need to urgently raise the OCR.
Both issues could cause the pullback in yield to extend a little further in the near-term. However, we do not expect a prolonged or deep decline in yields. We see sufficient latent payside demand in the ‘real economy’ to preclude that.
The recent pullback in swaps provides some hedging opportunities. Relative to our current ‘fair values’ for 2 and 3-year swaps of 3.80% and 4.10% respectively, market rates (3.38% and 3.75%) are once again moving into attractive territory. Even for 5-year swap, which we see as an ‘expensive’ point on the curve, a continued dip below 4.30% (currently 4.24%) would open up hedging ‘value’.
Overnight, in the backdrop of fairly buoyant equity markets, US 10-year bond yields once again showed little pulse as they traded between 2.51% and 2.53%. Meanwhile, as NZ bond yields have continued to decline in recent days, NZ-US 10-year spreads have narrowed notably. From above 220bps last week, spreads now sit at 206bps.
Today, the RBNZ releases its latest week’s mortgage approvals data which the market may scrutinise for LVR restriction impacts. Tonight US CPI will be delivered with ‘core’ expected to remain stable at 1.8%y/y. This suggests, for now, inflation is not an impediment to the US Fed maintaining highly accommodative policy.
In this regard, the Fed at its meeting tonight is widely expected to maintain its asset purchases at US$85b/month. However, it will likely take very dovish indications from the Fed for US 10-year yields to convincingly break through 2.50%. Here there appears strong resistance to further UST gains.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.