2-year swap is now at its highest level since July 2010, while NZ bond yields push higher across the curve

By Kymberley Martin

The NZ swap curve flattened on Friday as short-end yields continued to push higher while long-end yields followed offshore lower.

US 10-year bond yields ended the week at 2.60%.

The short-end of the NZ swaps curve extended its post-MPS moves on Friday. NZ 2 and 5-year closed up 5 and 3bps respectively to end the week at 4.18% and 4.57%.

2-year is now at its highest level since July 2010, although 5-year is still almost 20bps below January highs.

The recent rapid rise in yields has reduced ‘value’ in the swaps curve. However, we still see decent value in hedging interest rate risk on a 2-4-year time horizon based on our OCR forecasts. We see current 2-year ‘fair value’ around 4.50%. We also see 2-year approaching 4.80% by year-end.

Longer-dated NZ swaps followed the decline in offshore yields on Thursday night. NZ 10-year swap ended Friday 1bps lower at 4.91%, resulting in a flattening of the 2-10s swap curve to 74bps, its lowest levels since January 2009. We expect further flattening to a trough of 50bps in the year ahead.

Meanwhile NZ bond yields pushed higher by 3-4bps across the curve on Friday. The yield on NZGB23s now sits at 4.48%, back to where it traded in late April. We see the yield on 23s at 4.95% by year-end, although this will be an outperformance relative to swap on our forecasts.

On Friday night, US 10-year yields pushed up from 2.60% to 2.64% before returning to their original level.

The highlight of the domestic agenda for rates markets this week will be Thursday’s Q1 GDP release. Consensus expectations are already pretty high at 1.1%q/q (3.7%y/y), in line with our own and the RBNZ’s forecasts. This limits the chance of further upside surprise.

Today, the PSI will be released. We would not be surprised to see some moderation in the same vein as last week’s PMI.