Upward pressure on swap yields expected from positive NZ labour market reports

By Kymberly Martin

NZ swaps closed down 4-6 bps yesterday. Overnight US 10-year yields rebounded from 2.58% to 2.63%.

The move lower in NZ rates was largely a follow on from the dip seen offshore on Monday night. However, the move lower in short-end rates was limited by a reasonable amount of paying that is resulting from mortgage book and SME hedging.

As we move toward the first OCR hike in March, and in its immediate aftermath, we would expect this flow to sustain, pushing swap rates higher.

NZ 2 and 5-year swap ended the day at 3.81% and 4.50% respectively. The latter is now 25bps below its early-January highs.

NZ bond yields also closed down 4bps across the board. This takes the yield on NZ 10-year bonds to 4.50%, the bottom of our anticipated range for the year ahead.

We would not be active buyers at these levels but would not yet be aggressive sellers.

There is no further DMO issuance until 27 February and spreads to AU and US equivalents are not stretched. At 60bps and 187bps respectively they are still close to mid-range.

Yesterday the RBA moved away from its easing bias toward a neutral policy stance, while leaving the cash rate at 2.5%. This saw the market reduce expectations for a future rate cut reduced to 20%. AU short-end yields gap higher. For example, AU 2-year swap is 10bps higher this morning at 2.90%.

Combined with NZ moves this has seen NZ-AU 2-year swap spreads dip from 103bps to 90bps.

Overnight, as risk appetite improved US 10-year yields rebounded from 2.58% to 2.63%.

Today’s domestic focus will be NZ labour market reports. We anticipate some signs of heat. This should help put upward pressure on NZ swap yields today, along with the moves seen offshore overnight.

Tonight the data highlight will be the release of the US ADP employment report as a precursor to Friday’s payrolls report.