NZ swap and bond yields closed up 4-5 bps across the curve on Friday.
On Friday night, US 10-year yields ended the week at 2.16%.
In the absence of domestic data releases, offshore events set the tone for the local market on Friday. The early morning (NZT) speech by Fed Chair Yellen captured attention. She remained committed to hiking interest rates in the near future, saying it was likely appropriate to hike the Fed funds rate “sometime later this year”. She also stated that she felt current low inflation was likely due to transitory factors.
This helped prompt a 4-5 bps rise in NZ swap and bond yields. NZ 10-year swap closed at 3.58%, while the yield on NZGB27s closed at 3.32%.
At the short-end, NZ 2-year swap ended the week at 2.74%. The market prices that the OCR will be cut to below 2.45% by mid-next year. This appears a fair representation of current risks. Our central view remains the RBNZ will cut by a further 25bps, to a cyclical trough of 2.50%, by year-end.
There were also some notable moves in NZ credit markets last week. Spreads on corporate, bank and Kauri SSAs have all been marked wider. This is notable in the context of NZ bank spreads that traded a tight 5 bps range all of last year. It reflects generally increased global credit caution. The AU iTraxx index (a measure of hedging against the risk of default on AU investment grade equities) has pushed wider to 130. We have previously highlighted that historically this is the best indicator to watch for stress in NZ credit markets. A push toward 140 is normally associated with spreads being marked notably wider.
On Friday night, US 10-year yields spiked toward 2.20% after the release of an upward revision to US Q2 GDP. However, yields then drifted lower into the end of the week, to close at 2.16%.
Today there are no local data scheduled. Tonight all eyes will be on the US PCE deflator as the Fed’s preferred inflation measure, while Fed speakers will once again be out and about.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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.