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NZ yield curve flattened considerably with an RBNZ induced up bias at the short end, and a global down bias at the long end

Bonds
NZ yield curve flattened considerably with an RBNZ induced up bias at the short end, and a global down bias at the long end

By Jason Wong

In the post FOMC aftermath, US short term rates have drifted down ever so slightly, with weak GDP data adding to the tone.

The US 2-year Treasury rate is down 2 bps to 0.79%, fully unwinding the pre-FOMC gains seen over the previous week.

The move down in the 10-year rate post FOMC has been sustained and trades down 1 bp at 1.84%.  A better tone to the bond market was also seen across Europe, with Germany’s 10-year rate down 3 bps to 0.26%.

NZ’s yield curve flattened considerably, with the RBNZ’s stance imparting an upward bias to short end rates and global forces driving longer rates down.

While the Bank maintained a mild easing bias, it was certainly more hawkish than many in the market expected.  A no-change decision was expected to come with more dovish overtones but, if anything, the Statement read slightly more hawkish than March.  Short term interest rates rose immediately, with the bill futures strip through the rest of 2016 showing implied yields up in the order of 6-7 bps.  The 2-year swap rate closed 4 bps higher at 2.25%.

OIS pricing showed the June meeting at 2.11%, implying a slightly better than even chance of a 25 bps easing.  The OIS curve flattens out at 1.92% compared to 1.87% prior to the announcement, suggesting less market conviction that a total of 50 bps of easing will ensue over next 6-9 months.

The 10-year swap rate closed 3 bps lower at 2.97%, while the equivalent government bond rate was down 5 bps to 2.85%.

The RBNZ and FOMC announcements and weak Australian CPI figure have put the spotlight on some of our key views.

We still expect, on balance, a 25 bps cut at the RBNZ’s June meeting, though beyond that a further cut is a line-ball call. We still expect NZ 2-year swap to trade lower, though 2.0% may now be a stretch. We now see the RBNZ and RBA’s cash rate outlooks as somewhat similar. We therefore see NZ-AU 2-year swap spreads in a trading range around zero. We continue to see a steeper NZ curve by year-end as US long yields drag NZ equivalents higher. But near-term, US 10-year yields could well revisit April lows.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Jason Wong is on the BNZ Research team. All its research is available here.

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