By Kymberly Martin
NZ swaps closed down 1-2bps across the curve.
Overnight, US 10-year Treasury yields traded between 2.49% and 2.55%.
NZ 2 and 5-year swap closed at 4.23% and 4.66% respectively. 2-year remains a little below our calculation of ‘fair value’ (4.40%) based on our expectation the OCR will reach 5.0% by early 2016. However, as we approach an RBNZ ‘pause’ after its July meeting, we suspect ‘fair value’ will not be reached, imminently.
Across the Tasman the AU employment report was the highlight yesterday. While employment change was above expectation (15.9k vs. 12k) the unemployment rate ticked up more than expected, to 6.0% from 5.8%.
The seemingly split message in the data initially caused volatility in AU rates. AU swaps sit lower this morning.
This sees NZ-AU 2-year swap spreads touching new highs of 157bps. We believe we are likely approaching the peak on this spread. The market now prices around a 70% chance of a further 25bps cut from the RBA in the year ahead. Rather we see the data confirming the Bank will be hold for a long time.
Overnight, in the backdrop of softer equity markets, US Treasuries rallied. US 10-year bond yields dipped from 2.55% toward 2.49% before rebounding to 2.53%.
The Bank of England’s meeting passed without drama as it left rates at 0.50% and its asset purchase target at £375 bln. The market continues to price a first BoE hike around February next year.
Domestically, data showing June non-resident holdings of NZ Government Bonds will be released today. These ticked up to 64.6% in May. With recent signs of offshore demand for NZGBs we suspect the proportion of offshore holdings may continue to push higher.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.