NZ wholesale rates down sharply with a flatter curve. Markets see RBA and RBNZ on similar policy paths

By Kymberly Martin

NZ swap and bond yields closed down 5-11 bps yesterday with a slightly flatter curve.

Overnight, US 10-year yields traded between 1.77% and 1.82%.

NZ swaps moved sharply lower from the open reflecting the three catalysts highlighted yesterday; the RBA’s cut, reduced risk appetite and lower offshore yields and a disappointing GDT dairy auction. The rest of the day’s trading provided less drama. The NZ employment report came and went without having a notable impact on the rates market.

NZ 2-year swap closed down 7 bps, at 2.25%, while 10-year closed down 8 bps, at 2.97%. The market now prices close to a 65% chance of an RBNZ cut at its June meeting. It prices that the OCR will ultimately be cut to 1.93% within the year ahead.

Meanwhile the market now prices a trough in the RBA’s cash rate at 1.52% within the year ahead. This difference in expected trough cash rates is reflected in the NZ-AU 2-year swap spread now trading at 35 bps. We see this as being toward the upper-end of their expected trading range for the year ahead. We see the RBA and RBNZ having a fairly similar path ahead of them. Our central case sees the trough in both cash rates at 1.75%.

It was a choppy night for US Treasuries amidst weak equity markets. US 10-year yields gapped lower after the release of a weaker-than-expected ADP employment report. Although historically the survey is not well correlated with the US payrolls report, the market uses it to gauge risks around Friday’s release. US 10-year yields touched early morning lows approaching 1.77%. They then rebounded to above 1.81% after the release of a better-than-expected ISM non-manufacturing index. They now trade at 1.78%.

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