NZ-AU yields narrow as market retreats from expecting an AU rate cut, may narrow further

By Kymberly Martin

The NZ swap curve flattened further yesterday, while NZ bond yields declined across the curve.

Overnight, US 10-year yields traded from 2.47% down to 2.45%.

NZ 2-year swap closed 2 bps higher, at 4.12%, while 10-year closed down 1 bps at 4.73%, further flattening the curve.

There is still paying to be seen at the short-end via the mortgage book. By contrast, there appears to only be receive-side interest at the long-end, particularly from offshore participants.

Meanwhile, the bid tone in NZ Government bonds continues. NZ bond yields declined 4-6bps across the curve. The yield on NZGB23s has declined to 4.20%, within a whisker of late-May lows.

This was particularly impressive in the context of the rise in AU yields on the back of the stronger than expected AU CPI report.

This resulted in NZ-AU23 spreads plunging from around 100 bps to 90 bps on the day. We suspect the compression can go further. NZ swap-bonds spreads have also widened notably.

Equally, as AU short-end swaps popped higher, NZ –AU 2-year swap spreads compressed from 148 bps to 141 bps. The market now prices only a 40% chance of an RBA cut in the year ahead from around 50% immediately prior to the data.

Overnight, in the absence of key US data releases, and flattish equity markets, US yields traded tight ranges. US 10-year yields sit a little lower, at 2.45%, this morning.

Today, it is all about the RBNZ’s meeting domestically (9am NZT). We anticipate the Bank will raise rates by 25 bps but clearly indicate it is now on pause.

In our view, this pause will last until December, at least. Key developments to monitor for the resumption of the hiking cycle will be the high NZ TWI, contained CPI data and dairy price declines versus strong growth, migration and house price trends.