Disappointing Chinese data sees global swap and bond yields trade lower

By Kymberly Martin

There were big moves lower in NZ swap and bond yields on Friday. Offshore, US 10-year yields pulled back further to close the week at 2.72%.

NZ swaps closed down 3-8bps across the curve on Friday, taking their lead from offshore, post the disappointing China PMI reading.

There was also notable further flattening of the NZ 2-10s swap curve. It now trades at 123bps, its lowest level since mid-June last year. We anticipate further flattening to a trough of 80bps this year as OCR hikes get underway.

As we head into this Thursday’s RBNZ meeting the market still prices close to a 40% chance of a 25bps hike at the meeting. It prices around 115bps of hikes by year-end.

We anticipate a first hike in March and 125bps by year-end. This would take the OCR to 3.75% from its current historic low of 2.50%.

NZ 10-year bond yields gapped lower at the open on Friday and ended the week at 4.58%. This is toward the lower end of the 4.50%-5.10% trading range we see for the year ahead.

Still, with additional issuance of nominal NZGBs not scheduled until late next month we believe it is too early to be sellers of longer-dated NZGBs.

The ‘risk off’ sentiment continued in markets on Friday night, despite little in the way of new data releases. US 10-year bonds remained well-bid as a ‘safe haven’ asset, with yields closing the week at 2.72%. This is their lowest level since late November.

Today, while Auckland celebrates its anniversary day holiday, the NZ PSI will be released. Given the moves offshore on Friday night, further flattening of the NZ curve today is likely in the offing.