Mortgage demand may start impacting swap rates. Markets likely to ignore dairy auction but will focus on Q4 CPI

By Kymberly Martin

In a relatively quiet day of trading the NZ curve steepened a little.

Overnight, US 10-year yields have slipped to 1.77%.

The rates markets seemed fairly disinterested in the release of the QSBO yesterday that confirmed robust activity if limited pricing pressures.

NZ 2-year swap closed virtually unchanged at 3.73%. 10-year closed up 3 bps at 3.83%.

As markets return to normal vigour after the summer lull we expect to see increased payside flow at the short-end from the mortgage book, as borrowers look to take advantage of current low rates and specials.

We also anticipate increased corporate paying at the long-end as they seek to benefit from the current flatness of the curve.

However, offshore receiving interest will likely remain persistent given expected low-side inflation readings in coming months.

Today’s Q4 CPI release will be important. We expect a -0.1%q/q reading (consensus 0.0%).

The January German ZEW survey of analysts’ views on the economy showed sentiment holding up well despite the imminent Greek elections. German 10-year yields traded up from intra-night lows around 0.43%, to above 0.45%. US equivalents initially pushed up from 1.79% to above 1.83%, but have subsequently declined to 1.77%.

The GDT dairy auction overnight is unlikely to notably impact the rates market this morning that will be firmly concentrated on the Q4 CPI release (10.45am NZT).