2 year swaps at their lowest level since January 2013. Fed speakers try to get markets believing a 2015 rate hike still likely

By Kymberly Martin

NZ swap and bond yields closed down 4-5bps across the curve yesterday.

Overnight, US yields pushed higher across the curve, taking 10-year yields back up to 2.20%.

NZ yields slipped a little further yesterday, mimicking the extended post-Fed move seen offshore on Friday night. Moves were relatively uniform across the curve.

2-year swap closed down 4 bps, at 2.69%, close to its lowest level since January 2013. This is slightly below ‘fair value’ based on our core view the RBNZ will cut the OCR to a trough of 2.50% by year-end.

However, we anticipate the market will likely move to further price a sub-2.50% OCR in coming months, even if ultimately not delivered. This occurred during late 2011-2012 when the RBNZ kept the OCR at 2.50%, but the market was regularly inclined to price further cuts.

Overnight, as equities made modest gains and the USD rebounded, US Treasuries sold off. The move was likely also helped by comments from Fed’s Lockhart. Talking about a potential Fed rate hike, he said, “I am confident the much-used phrase ‘later this year’ is still operative”. Our central view remains a first hike in December.

Opening for the week below 2.13%, US 10-year yields have traded up to 2.20%. This will likely see NZ longer-dated yields reverse much of yesterday’s decline today, with potential for some slight steepening of the NZ curve. Our core view remains however, that longer-dated NZGBs are likely to outperform USTs during sell-offs. We continue to prefer to position for spread compression near the upper-end of NZGB-UST 10-year range.

Yesterday, the LGFA announced the details of its latest tender to be held on Wednesday. On offer are NZ$20m of LGFA 2020s, NZ$20m of LGFA 2023s and NZ$100m of LGFA 2027s.

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