By Kymberley Martin
Overnight, US 10-year yields slipped back from 2.55% to 2.50%.
NZ swaps closed flat, to up 2bps yesterday, with a slight steepening to the curve.
The market still prices around an 85% chance of a 25bps OCR hike at the RBNZ’s 12 June meeting.
We expect it will hike. But the market now only prices around 125bps of cumulative hikes in the coming two years.
Even while we recognise the risk the RBNZ may slow its near-term pace of hikes due to stubborn NZD strength, we see 200bps of hikes over the next two years.
We therefore see ‘value’ in hedging interest rate risk over a 2-5-year time frame at current swap rates.
In addition, the recent US lead decline in NZ 10-year yields has also opened up opportunities for corporates looking to hedge further out the curve.
We continue to see higher swaps across the curve by year-end.
Overnight, in the absence of US data releases, but slightly softer equity markets, US Treasury yields subsided. US 10-year yields now sit just above 2.50%.
While German equivalents held steady, peripheral European spreads continued to widen. For example, Italian-German 10-year spreads now sit at 191bps, up from 147bps a fortnight ago.
However, on an outright basis, the yield on Italian 10-year bonds (3.25%) still sit some way below NZ’s (4.25%).
Today the Bank of Japan announces its policy decision.
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