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NZ swap still below fair value. Expect swap-bond spreads to widen towards 55 bps, says BNZ

Bonds
NZ swap still below fair value. Expect swap-bond spreads to widen towards 55 bps, says BNZ

By Kymberly Martin

NZ swaps closed up 4-6 bps yesterday.

Overnight, US 10-year yields dipped further, to 2.52%.

The push higher in NZ swaps yesterday was largely independent of offshore moves.

This saw the likes of NZ-AU 2-year spreads push out to 145 bps, and NZ-US3-year spreads to 337 bps. NZ 2-year swap closed at 4.20%.

We continue to see ‘fair value’ at 4.4% based on our expectations the OCR will reach 5% by early 2016.

NZGB yields also pushed higher yesterday, with the yield on NZGB23s, up 3 bps, to 4.48%. Swap-bond spreads widened.

The spread between NZGB23s and equivalent swap has widened to 38 bps from recent lows close to 35 bps. We expect further widening toward 55 bps.

Overnight, US PCE deflator data came in close to expectation (core 1.5%y/y). However, US Treasury yields dipped across the curve on the result. US 10-year yields slipped from 2.56% to 2.52%.

The fact speculative positioning in US 10-year Treasuries remains short suggests yields remain inclined to slip if data does not surprise to the upside. A 2.40-2.80% range may contain yields in the near-term.

Today, the trade balance will be released domestically, though is unlikely to be a major rates markets mover.

Tonight, the University of Michigan consumer confidence survey will be released.

Daily swap rates

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Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA

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