Yields expected to rise as US employment improves; upward pressure on NZ swap rates with curve slightly steeper

By Kymberly Martin

NZ swaps pushed a little higher across the curve.

Overnight, US 10-year yields dipped from 2.80% to 2.78%.

NZ 2-year swap pushed above 4.10% intra-day yesterday, following the previous night’s offshore move.

However, the familiar theme of offshore receiving interest at this level appears to be playing out. 2-year closed at 4.08%. 5-year swap traded a similar pattern, closing only fractionally higher at 4.68%.

The 2-10s swap curve closed a smidge steeper at 100bps.

We are happy to remain positioned for near-term steepening given the position has positive carry.

We also anticipate that a solid US payrolls number tonight would see US 10-year yields push higher, dragging the NZ long-end with it.

NZ 10-year bond yields closed a fraction higher at 4.63%. Spreads to AU and US equivalents sit at 55bps and 201bps respectively. A strong US payrolls release tonight would likely see US 10-year yields break through the top of its recent range (2.80%). This would result in the latter spread narrowing.

For now, US 10-year yields sit at 2.78%. Yields slipped from 2.80% after the release of a slightly disappointing March ISM non-manufacturing index (53.1 vs. 53.5 expected).

There is nothing scheduled on the domestic agenda today. Tonight is all about US March payrolls. Consensus has recently revised its expectations higher to 200k, a step up from the 175k February release. A significant upside surprise is therefore less likely. However, even an in line delivery may be sufficient for US 10-year yields to test the top of their ten week range.