BNZ expects the rate curve to steepen through 2015. Disappointing GDT auction result will keep markets subdued

By Kymberly Martin

NZ swaps closed up 1 bp across the curve in a quiet day of trading.

US 10-year yields traded a tight range overnight, sitting just below 2.33% at present.

NZ 2-year swap remains at 3.95%. This is a touch below ‘fair value’ based on our projections that the OCR reaches 4.25% by early 2016.

Still, we do not expect 2-year to break higher until well into 2015, when evidence of inflation is finally forthcoming.

At present we believe borrowers can afford to be patient with hedging at the short-end.

NZ 10-year swap has closed up 1 bp at 4.46%, with the 2-10s curve at 51 bps. We continue to see a bias for the curve to steepen through next year.

Across the Tasman the RBA Minutes confirmed the Bank will remain on hold for a prolonged period and that it still considers the AUD to be too high. There was little to surprise in this message. However, the likes of AU 3-year swap subsided into the close, trading down from 2.88% to 2.85%.

Overnight, in the backdrop of positive equity markets, German and US bond yields largely traded sideways. The yield on German and US 10-year bond sit at 0.80% and 2.32% respectively.

The overnight GDT diary auction was slightly disappointing, posting a further fall in average prices (-3.1%). This may keep the market subdued in a day with an otherwise sparse data agenda.