sign up log in
Want to go ad-free? Find out how, here.

Markets raise OCR cut bets after poor dairy auction. But strong US payroll data raises US benchmark rates

Bonds
Markets raise OCR cut bets after poor dairy auction. But strong US payroll data raises US benchmark rates

By Kymberly Martin

The NZ swap curve steepened yesterday.

US 10-year yields traded up from 2.36% to 2.42%.

NZ longer-dated swaps sold off yesterday and swap-bond spreads widened a bit further.

The yield on 10-year swap closed up 5bps, at 3.95%, taking the 2-10s curve back up to 85 bps. We continue to see the curve steepening within a 75-115 bps range through to year-end.

Overnight, while equities enjoyed a rebound, European CDS spreads (a measure of credit default risk) narrowed. German 10-year bonds sold-off. From 0.76%, yields now sit around 0.81%.  Italian-German bond spreads narrowed from 157 bps to 148bps.

US yields moved higher, also assisted by a solid US ADP employment report that beat expectations. This will likely encourage the market in its expectations for the US payrolls report tonight. Ahead of this, US 10-year yields trade at 2.42%. A positive surprise tonight could see yields pushing back up toward range highs, of 2.50%.

However, while Greek uncertainty remains, it is difficult to see yield breaking above this level.  By year-end we continue to target 2.75%.

Overnight moves will likely result in a steeper NZ curve today, especially as another weak GDT dairy auction overnight will likely put downward pressure on short-end yields. i.e. encourage the market in pricing RBNZ rate cuts.

The market currently prices almost 50 bps of cuts in the year ahead. This is a fair representation of risks.

---------------------------

Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily swap rates

Select chart tabs

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

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.