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Markets expect RBNZ rate cuts and US Fed rate hikes, pushing each end of the rate curve in opposite directions

Bonds
Markets expect RBNZ rate cuts and US Fed rate hikes, pushing each end of the rate curve in opposite directions

By Kymberly Martin

The NZ curve steepened yesterday as short-end yields dipped while long-end yields rose.

Overnight, US 10-year yields fell from 2.32% back to 2.27%.

NZ 2-year swap closed down 1 bps, at 2.93% yesterday. The market continues to price an OCR that falls toward 2.60% by early next year. If we are right and the RBNZ makes two successive 25 bps cuts, to 2.50% by the Oct meeting, 2-year swap will likely fall further in the months ahead. We look for it to trade down toward 2.70%.

There will be plenty to influence short-end yields in the week ahead, with today’s ANZ business confidence survey and next week’s Q2 unemployment rate and GDT dairy auction.

Meanwhile, NZ long-end swap and bond yields rose yesterday after the US FOMC statement implied the Fed was still on track to raise rates by year-end. NZ 10-year swap closed up 4 bps, taking the 2-10s curve to 81 bps, from an early-week trough around 73 bps. Long-end NZGBs also sold-off. NZGB27 yields rose 9 bps to 3.42%.

Overnight, US 10-year yields pushed up above 2.32% ahead of the release of US Q2 GDP. The slightly lower than expected reading resulted in US 10-year yields dropping to trade at 2.27% currently.

Tonight, there is a smattering of US data releases to take us into weekend.

Stepping back, we still see US 10-year yields broadly trading in a 2.20-2.50% range. We see this range as likely being broken to the high-side, assuming the Fed pulls the trigger on rate hikes later this year. We anticipate US 10-year yields trading toward 2.75% by year-end, which will add additional steepening pressure to the NZ curve.

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

Daily swap rates

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Source: NZFMA
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