Aussie cash rate heading for a prolonged stable period at 2.5%, unlike NZ which will be at 5% at end of 2015

By Kymberley Martin

It was a very quiet day in NZ markets. Overnight, US 10-year yields traded a 2.72% to 2.76% range.

Both NZ bond and swap yields closed little changed yesterday. 2 and 5-year swap sit at 4.01% and 4.62% respectively. We continue to see ‘fair value’ on 2-year swap around 4.30%.

The biggest domestic news yesterday was the announcement by the DMO of its issuance schedule for the final quarter of the fiscal year. As anticipated, supply remains fairly constrained. There will be three tenders of nominal NZGBs over the quarter totally $700m. There will also be $400m of inflation-indexed bonds offered over two auctions.

Fundamental supply constraint should see swap-bonds spreads biased to widen, as the OCR rises.

We anticipate the next 25bps OCR hike on April 24 and that the cash rate will be at 4% by the end of this year, and 5% by the end of next.

Overnight, US 10-year yields rose as high as 2.76% ahead of key US data releases. Data was mixed. While March consumer confidence was stronger than expected (82.3 vs. 78.5) the Richmond Fed manufacturing index disappointed (-7 vs. 4 expected). Subsequently, US 10-year yields slipped back to 2.73%, while US equities have held onto modest gains.

Today the RBNZ will release its latest LVR and mortgage approvals data, both closely watched indicators of the housing market.

In Australia, RBA’s Lowe and Governor Stevens are scheduled to speak today. At present the market prices less than a 10% chance of a further rate from the RBA. Rather it prices around a 60% chance the AU cash rate will be 25bps higher in a year’s time.

We believe that timing is premature to be looking for rate hikes across the Tasman. Similar to the recent experience in NZ, we see a prolonged period ahead where the cash rate will be at 2.5%, at most.