By Kymberly Martin
There was a little more activity in NZ markets yesterday with likely some squaring up ahead of tomorrow’s RBNZ meeting.
Overnight, US 10-year yields traded a 2.74% - 2.78% range.
The previous days move in 2-year swap below 3.80% appears to have drawn payers back in at the short-end of the curve. Some paying pressure resulted from mortgage book hedging interest. 2-year swap closed at 3.83%. 5-year sits at 4.52%.
Meanwhile NZ bond yields closed down 1-2bps across the curve. NZ 10y bond yields closed at 4.57%. This is at the lower end of the 4.50%-5.10% range we anticipate for the year ahead.
However, we are not yet at levels that we would be sellers outright, or relative to AU bonds. This is especially so given no further nominal bond issuance from the DMO until late February.
Overnight, US 10-year yields paddled slightly higher ahead of the release of US durable goods orders. The unexpected decline in December (-4.3% vs. 1.8% expected), saw yields gap from 2.78% to below 2.74%. Subsequently they have clawed their way back to 2.76%.
Yields remain mid the 2.50%-3.00% range we see in the year ahead. Now all eyes will be on the US Fed’s rate decision at 8am tomorrow morning (NZT).
The Fed is still widely anticipated to reduce its asset purchases by a further US$10b/month while leaving its target rate unchanged at 0.25%. There are murmurs the Fed could also address its unemployment ‘target’ (6.5%), established for re-assessing its rate setting. This now looks uncomfortably close (6.7%). It could lower the target or eliminate it altogether. Either, would likely initially be seen as a dovish signal by the market, resulting in a short-term dip in US yields.
Today, keep an eye out domestically for the release of the latest RBNZ data on high LVR loans. Otherwise it will be all eyes on tomorrow morning’s RBNZ meeting. We continue to expect the RBNZ to remain on hold, in order to be consistent with its previous indications. But we expect it to set the stage for the start to a prolonged hiking process in March.
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