By Kymberly Martin
NZ long-end swaps declined further yesterday. Overnight, US 10-year yields pushed up to 2.67%.
We continue to see opposing forces on either end of the NZ swap curve. The short-end is being underpinned by resounding strength in recent domestic data. NZ 2-year swap closed up 2bps yesterday.
Meanwhile the long-end of the curve has been dragged lower in line with moves offshore, instigated by heightened risk aversion (focused on Ukraine). Consequently the NZ 2-10s swap curve flattened a further 5bps to 112bps yesterday.
NZ 10-year swap closed at 4.93%. This is around 40bps below its late December highs.
It represents a hedging opportunity for corporates who may be looking to fix further out the curve. We see this as a dip within a broadly rising yield environment. Our expected range on 10-year swap for the year ahead is 4.90%-5.50%.
Meanwhile NZ bond yields closed up 1-2bps. This saw NZ swap-bond spreads plunge to the bottom of recent ranges. We see 10-year swaps spreads (29bps) at attractive levels for paying.
Yesterday the RBA left the cash rate at 2.5%, as widely expected, maintaining its neutral policy stance. It is clear that the RBA is on hold for some time. However our NAB colleagues expect the AU unemployment rate to be near 6.5% by year-end with investment falling around 8% in 2014-15. If house price growth eases through the year, that would give the RBA room to cut again to further support investment and employment growth in the economy.
Overnight, there was little data of note as attention remained firmly on geopolitical developments. Amongst the barrage of headlines the market seized on comments from Russia’s Putin. He said that there was no need at present to use military force in the Ukraine, although he maintained the option to do so. This contributed to a strong rally in equities and US 10-year yields moving up from 2.60% to 2.67%.
This should see upward pressure on the long-end of the NZ curve today, with potential for wider swap spreads.
Today, building work is the only domestic data release. Across the Tasman the focus will be on the release of AU Q4 GDP.
Tonight the Bank of Canada announces rates and the US ADP employment report and Fed’s Beige Book are released.
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