By Kymberly Martin
It was a relatively quiet day in NZ markets ahead of the RBNZ’s meeting today.
Overnight, the drift higher in US long-yields continued.
NZ yields closed up 1-2 bps across the curve yesterday. NZ 2- and 5-year swap closed at 4.11% and 4.49% respectively.
These both remain below what we calculate to be ‘fair value’, even on our revised OCR track (that sees hikes resuming next March and a 4.75% peak in 2016).
Still, we think in the near-term, short-end yields will likely be somewhat range-bound as the RBNZ maintains an extended pause.
We anticipate the Bank will indicate that more clearly at its meeting today, and highlight some of the recent downside risks to the economy including the plunge in dairy prices.
The yield on NZ bonds also pushed higher yesterday. The yield on NZGB23s now sits at 4.24%, almost 20 bps off its early-September lows. However, we reiterate we would not be outright buyers at these levels or on spreads to offshore equivalents. However, we would consider buying NZGB23s relative to swap if spreads dip below 38 bps.
In a fairly quiet night on the data front, US 10-year yields pushed higher ahead of an auction of Treasuries early this morning. The 10-year bonds were sold at a yield of 2.53%, up from 2.44% at the previous event.
The move higher in US yields overnight may put some upward pressure on the NZ curve this morning, but this will likely be trumped by the RBNZ message at 9am.
Across the Tasman, today’s focus will be the AU employment report. Currently the market prices around a 15% chance of a 25 bps cut from the RBA by mid next year.
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