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By signaling concerns for an overheated housing market, RBNZ very unlikely to cut OCR; ECB QE arrives amid raised growth; eyes now on US non-farm payrolls

Bonds
By signaling concerns for an overheated housing market, RBNZ very unlikely to cut OCR; ECB QE arrives amid raised growth; eyes now on US non-farm payrolls

By Kymberly Martin

NZ swaps closed down 1-3bps across the curve yesterday.

Overnight, US 10-year yields traded between 2.10% and 2.14%.

It was a relatively quiet day for NZ swaps with no domestic data scheduled.

However, swaps declined a little into the close after the RBNZ announcement that it is undertaking further consultation on investor property loans. It is still at the stage of seeking to define what ‘investment’ property is.

Possibilities presented are properties that is not owner-occupied, or properties where the source of all (or some) of debt servicing is from rental income.

It is envisaged that banks will need to set aside additional capital for these loans that are deemed ‘risker’ than those for home ownership.

It will likely be a long road to implementation. However, it highlights the RBNZ’s severe concern regarding the overheating housing market. The document emphasises this is strictly from the perspective of the Bank’s financial stability mandate.

We would suggest this is not an environment where a central bank would consider cutting the OCR.

The market’s response suggests it sees these steps as ‘sorting out’ the housing market to allow the Bank greater potential to cut rates.

NZ 2-year swap closed down 2 bps at 3.59%. The 2-10s swap curve has steepened to 27 bps. As previously argued, we see the NZ curve as biased to steepen further in either a ‘bull’ or ‘bear’ scenario.

Overnight, German yields experienced heightened volatility around the ECB’s announcement. 10-year yields spiked above 0.42% before later slumping toward 0.32%.

ECB’s Draghi struck a cautiously optimistic tone. The Bank has revised up its growth forecasts for this year and next to 1.5% and 1.9% (1.0% and 1.5%) previously. However, inflation forecasts were revised down.

He detailed that asset purchases will start on 9th March. Assets between 2 and 30 years will be bought, weighted according to outstanding amounts.

Elsewhere the Bank took a fairly hard-line stance on Greece, suggesting further reforms will need to take place to gain further bailout payments.

US 10-year yields experienced a bit of volatility around the announcements but have returned to trade at 2.12%.

Now it’s all eyes on tonight’s US payrolls data.

It will likely take a notable upside surprise in tonight’s report for US 10-year yields to break through mid-Feb highs at 2.16% (Above this level the next line of resistance for yields lies around 2.22% ahead of the 200-day moving average at 2.31%). This is especially true as speculative positioning is already short 10-year Treasuries (though not at extreme levels).

Crucial will be the average hourly earnings number.

 

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Source: NZFMA

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