By Kymberly Martin
It was a relatively quiet day in NZ markets. Swaps closed up 1-2bps while bond yields closed up 2-3bps.
Overnight, US 10-year yields gapped higher on the back of a strong Empire Manufacturing report, to trade at 2.89% currently.
NZ 2 and 5-year swaps closed at 3.82% and 4.63% respectively yesterday. 2-year swap is about 7bps down from its early year highs while 5-year is down around 13bps.
New year, mid-curve, kauri issuance is prompting receiving interest which is weighing on this part of the curve.
Our core assumptions are that the RBNZ begins to raise rates in March, steadily ‘normalising’ the OCR to a level of 4.50% by end-2015. In that case 2-year swap ‘fair value’ currently sits around 3.90% and 5-year around 4.30%.
Therefore 5-year rates still appear the relatively ‘expensive’ point on the curve for paying, unless a borrower believe the OCR will ultimately peak above 4.50%. The risks are certainly tilted in this direction, in our view.
Overnight, US 10-year yields traded a quiet path along 2.87% ahead of the release of the Empire Manufacturing survey (12.51 vs. 3.50). They then surged as high as 2.91% before returning to sit around 2.89% currently.
Today there is little scheduled on the domestic agenda, although all heads will swivel to look across the Tasman for the AU employment report (1.30pm NZT).
Heading into the release the market prices around a 45% chance of a further rate cut from the RBA by mid this year.
Our NAB colleagues anticipate a further cut this year, partly predicated on further deterioration in the labour market. For today, they, along with consensus, expect the AU unemployment rate to remain constant at 5.8%.
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