The near-term bias is for further steepening, but longer term expect to see a flatter curve: BNZ

By Kymberly Martin

NZ yields pushed higher by 3-6 bps across the curve yesterday.

Overnight, US 10-year yields spiked above 2.61% before returning to 2.56%.

The push higher in NZ yields followed the previous night’s push higher in US yields, prompted by the strong US Q2 GDP print.

While 2-year swaps rose 3 bps, to 4.09%, 10-year swaps pushed up 6 bps, to 4.78%. This sees the 2-10s swap curve steeper at 69 bps.

The near-term bias is for further steepening, but strategically we continue to see a flatter curve, with a 40 bps trough in the year ahead.

The yields on NZGB23s have also rebounded from their range lows to close yesterday at 4.26%. NZ-AU23 and NZ-US spreads now sit at 82 bps and 184  bps respectively.

We continue to see NZ-US spreads in a 180-220 bps range in the year ahead.

Overnight, US yields briefly spiked higher after the release of US Q2 data showing the employment cost index rose 0.7%q/q (0.5% expected), the highest level since 2008. US 10-year yields jumped above 2.61%, before returning to trade at 2.56% this morning.

A disappointing Chicago PMI (52.6 vs. 63.0 expected) assisted the pullback in yields, as the market now positions for tonight’s US payrolls data.

There is still potential for US yields to dip back towards their lows if payrolls disappoint expectations (230k) this evening, given speculative positioning remains short 10-year Treasuries.

On the domestic front there is no data of note today, and we suspect the local market will be keen to avoid large moves ahead of tonight’s US data risk.