By Kymberly Martin
NZ swaps closed down 2-4 bps across the curve yesterday.
Overnight, US 10-year yields pushed up from 2.46% to 2.51%.
Yesterday the RBNZ raised the OCR by 25 bps as anticipated. It also indicated that it would now pause in its rate hiking cycle. i.e. it will undergo a “period of assessment” before raising interest rates again.
But it still sees the need to get rates back toward “more-neutral levels”. Recall, the RBNZ (and our own) analysis sees the NZ neutral OCR around 4.25%-4.50%.
We continue to see the RBNZ pausing 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.
NZ 2 and 5-year swap now sit at 4.09% and 4.46% respectively. The pullback in 2-year could well extend toward 4.00%, but we would see this as a hedging opportunity. We continue to see ‘fair value’ around 4.40% based on our view the OCR will ultimately reach 5.0% by early 2016.
NZ bond yields initially fell after the RBNZ release but crept back to previous levels later in the day. NZ-AU 2023 bond spreads dropped to levels that would suggest exiting a compression trade (85 bps). We are also now approaching levels on NZ-US 2023 spreads (currently 185 bps) to enter a widening position. But we continue to expect NZGB 2023s to outperform relative to NZ swap, in the near-term.
German and US bond yields were on the ascendancy last night after EU PMI data surprised modestly to the upside. German 10-year bond yields moved up from 1.14% to 1.18%, while US equivalents moved from 2.46% to 2.51%. This was despite subsequent US PMI and home sales data that was below expectation.
Today, the ANZ July business confidence survey will be released. We anticipate confidence and activity may have cooled a bit. But we’ll also be watching the inflation indicators of the survey, as will the RBNZ, now that it has paused in its rate hiking cycle.
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.