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Rate yields in volatile moves with NZ 2-10 curve up to +51 bps. US and AU payroll data will drive next changes

Bonds
Rate yields in volatile moves with NZ 2-10 curve up to +51 bps. US and AU payroll data will drive next changes

By Kymberly Martin

There was a stark further steepening of the NZ swap curve yesterday.

Overnight, US 10-year yields pushed up from 2.18% to 2.24%.

It was a particularly volatile day in NZ swaps yesterday.

Initially short-end swaps traded sharply higher, in response to what the market saw as the less dovish tone at the RBA’s meeting the previous afternoon.

NZ 2-year swap traded up 7 bps, to 3.58%. However, the move was more than reversed after the release of the NZ employment report, which showed no signs of a pickup in wage inflation. NZ 2-year swap closed down 6bps on the day, at 3.45%.

At the margin, we believe the data raises the odds of an RBNZ cut in the year ahead. However, our central case remains the RBNZ is on prolonged hold, and maintains a high hurdle to moving rates in either direction.

In particular, we believe the market’s pricing of near-term rate cuts (almost 50% chance of a cut by the July meeting) is too aggressive.

Conversely, long-end swaps rose yesterday, taking their cue from US yields.

This resulted in the NZ 2-10s swap curve steepening up to 51 bps. From here, direction of the NZ curve will likely be determined by moves in US 10-year yields.

It will be crucial to see if they can push through early-March highs of 2.26% (currently 2.23%).

Friday night’s US payrolls release will likely be the final arbiter. However, we suspect after the recent rapid run-up in US yields the risks are now tilted toward a disappointment from Friday night’s data. This could then lead to a period of consolidation for both US and NZ long yields.

Today’s key local focus will be the AU employment report. Although notoriously volatile, its outcome will impact on AU short-end yields with some contagion likely felt by NZ equivalents.

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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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA

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