More rises in NZ swap rates; NZGS yields higher too; spreads to AU widen

By Kymberley Martin

NZ swaps pushed up 2-3bps across the curve yesterday.

Overnight, US 10-year yields traded between 2.72% and 2.76%.

NZ swaps ground higher yesterday. NZ 2 and 5-year swap closed at 4.05% and 5.03% respectively.

The 2-10s curve remains around 0.98bps.

It was a fairly quiet day in NZ Government bonds with yields closing around 1bps higher. The yield on NZGB23s now sits at 4.58%. NZ-AU23s spreads sit at 60bps.

For much of the year ahead we see spreads contained within a 45-80bps range. Although we see the RBNZ hiking fairly aggressively while the RBA is ‘on hold’, we see supply dynamics for NZGBs as more supportive than those for AU Government bonds.

At the short end of the curve we expect NZ-AU spreads to widen this year.

We see NZ-AU 2-year swap spreads (currently 112bps) at 160bps by year-end. Today, the RBA will meet to announce its target rate. The RBA is almost unanimously expected to remain on hold. Its commentary will likely reiterate its central tenet from its March meeting that, “the most prudent course is likely to be a period of stability in interest rates”. The market currently prices only a 5% chance of a further rate cut from the RBA in coming months. It also prices a 75% chance of the AU cash rate being 25bps higher in a year’s time. We see this as premature.

Overnight, US 10-year yields remained range-bound. Even a disappointing Chicago PMI and relatively dovish Yellen commentary wasn’t enough to move markets much. As if to counteract her recent “6 month” statement Yellen reminded markets that “unprecedented stimulus will be needed for some time”.

Today there are no domestic data releases scheduled. However, market sentiment this afternoon will likely be impacted by the release of the China March PMI (50.1 expected). Tonight Eurozone and US PMI will be released.