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NZ swap yields drift lower on QSBO, downward pressure to continue today. NZGB 15 April matures today

Bonds
NZ swap yields drift lower on QSBO, downward pressure to continue today. NZGB 15 April matures today

By Kymberly Martin

NZ swaps closed down 1-2 bps yesterday.

Overnight, US 10-year yields fell from 1.92% to 1.87%.

Despite a solid QSBO yesterday that showed a further extension of capacity utilisation rates, indicative of medium-term inflation pressures, NZ swaps drifted lower.

The overall message we took from the business survey was that there is no imminent inflation concerns and the RBNZ is justified in being on hold for a prolonged period.

However, we still think the market’s pricing of more than a 25% chance of an RBNZ cut by June is misplaced. We would trade against the prospect of near-term cuts.

The NZ 2-10s swap curve has been fairly steady around 20 bps for much of the past month. Dips below 10 bps remain attractive opportunities to extend hedging out the curve, in our view. We continue to see the curve trading up to 50 bps in H2.

Directional moves will be somewhat dictated by moves in US long yields. The annual correlation between moves in US 10-year and NZ 10-year swap remains at a healthy 60%. Overnight, US yields gapped lower across the curve after the disappointing March US retail sales data.

From 1.92%, US 10-year yields gapped below 1.89% before drifting down to consolidate around 1.87% over the early hours of this morning. This move also helped German equivalents touch new historic lows of 0.13%.

These moves will exert downward pressure on the long-end of the NZ curve today. Broader market sentiment today will likely be driven by the release of China data this afternoon.

Today also brings the maturity of the NZGB 15 April which results in duration extension for the NZGB index.

Tonight, the ECB and Bank of Canada announced their rate decisions. ECB’s Draghi is expected to express cautious optimism regarding the impact of QE to date but committed to full implementation of the QE programme.

Daily swap rates

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Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA

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