Rate rise trends running out of steam; swaps and bond yields down, UST yields at bottom of recent range

By Kymberly Martin

It was a fairly quiet day in the NZ market, with yields closing down around 2bps across swap and bond curves.

As NZ swaps declined for a second consecutive day, the end of year push higher in yield appears to be running out of steam.

For the front-end of the curve, as we approach the end of month RBNZ meeting, the market is likely questioning whether the Bank will actually pull the trigger and raise rates.

Around a 50% chance of a hike at this meeting is still priced. We continue to believe that this would be inconsistent with RBNZ previous communications. Rather, we believe the Bank will use the meeting to set itself up for a first hike in March.

Meanwhile NZ 10-year bonds ended the day at 4.71%. Yields have traded in less than a 20bps range over the past two months. We foresee a 4.50% to 5.10% range in the year ahead.

Overall we expect positive returns as “carry” offsets any drift higher in yield. We believe NZGB supply constraint will limit the sell-off in longer-dated NZGBs despite a rising OCR in the year ahead.

We continue to see the OCR being 125bps higher (at 3.75%) at year-end.

Overnight, in the backdrop of relatively light data-flow but positive equity markets, US benchmark 10-year yields traded a tight range between 2.94-2.96%. They sit at the bottom of this range at present.

It is once again quiet on the domestic data front, although QV house prices are scheduled for release by week end.

A strong result (200k expected) in tonight’s US ADP employment report could see US 10-year yields re-testing their 3.0% peak. The Fed’s December Minutes will also be released. If a tight consensus behind the Fed’s decision to begin ‘tapering’ in December is shown, this would suggest a steady progression of tapering at coming meetings is more likely.