By Kymberley Martin
The NZ swap closed up 1-3bps yesterday.
Overnight, US 10-year yields traded between 2.58% and 2.61%.
It was relatively quiet yesterday compared to the action of recent days. Swaps pushed a little higher with flattening of the curve still in play. The 2-10s curve is now at 71bps.
NZ 2-year swap now sits at 4.21%. Based on our projections for the OCR to reach 5.00% by the end of next year we see current ‘fair value’ around 4.50%. We see short-end yields continuing to grind higher as paying activity is seen via the mortgage and SME sectors. However, we are alert to any potential data disappointments that could quickly entice offshore receivers back into the market.
There are no domestic data releases scheduled today, although the latest GDT diary auction will take place overnight. Prices likely still have a little further to fall yet, which could keep alive speculation around the robustness of NZ’s economic momentum.
There was little movement in NZ bonds yesterday. However, this week will be all about issuance.
There is NZ$300m of NZGB issuance scheduled for this Thursday, most likely of the 2020 maturity. In addition, the LGFA (Local Government Funding Agency) announced yesterday it will tender NZ$155m of bonds this week, mostly of 2023 maturity.
The combined $455m of predominantly longer-dated bonds hitting the market this week, should see selling pressure on NZGBs continue. This is despite the recent underperformance of NZGBs relative to AU and US counterparts.
With negative headlines from both the Ukraine and Iraq overnight there was plenty to subdue US yields. However, a round of positive US data release early this morning (including the Empire Manufacturing survey and industrial production) helped prop up yields. US 10-year yields crept up from below 2.58% to trade around 2.60% currently.
Across the Tasman, the focus today will be the release of RBA Minutes. There is unlikely to be much to change the markets current expectation for a first RBA rate hike in Q4 next year.
Tonight, US May CPI data will be in the spotlight. There is growing speculation the Fed will make greater reference to rising inflation indicators at Thursday morning’s (NZT) Fed meeting.
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