Swap yields drive higher but 2-10 curve still near bottom of expected range; one further rate cut in NZ a fair representation of current risks

By Kymberly Martin

NZ swaps closed up 3-5bps and NZGB yields up 2bps at the start of the week. Overnight, the US Treasury market was closed.

In the absence of domestic data releases yesterday, NZ swaps followed Friday night’s nudge higher in US yields.

NZ 2-year swap closed for the day at 2.31%. The market now prices only a 20% chance of a cut at the 9 June meeting and that the OCR will trough just below 2.00% with the coming 12 months. i.e. the market prices only one further rate cut within the year ahead. This seems a fair representation of current risks.

The 2-10s swap curve continues to hover near the bottom of expected ranges. From circa 60bps we look for a move up to 100bps by year-end, as NZ 10-year swap trades back above 3.0%. This central view is consistent with our expectation that US 10-year yields will ultimately break higher as the Fed delivers further hike(s). We see the top of their range in 2H at 2.25%. Currently they remain at weekend levels, at 1.85%, given the Treasury market was closed for US Memorial Day yesterday.

Other markets were also fairly quiet offshore. German 10-year yields traded slightly higher. From 0.14% they now sit at 0.17%.

Today the domestic focus will be the release of the ANZ business confidence survey. The rates market will likely give greatest attention to inflation gauges in the survey, given the RBNZ’s current sensitivity to inflation expectations. If expectations hold at last month’s level short-end rates will likely remain fairly steady. If there is any slippage then the market may be inclined to increase its pricing of a near-term OCR cut.

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