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Provided the RBNZ doesn't surprise today, NZ longer-dated yields likley to fall further following offshore trends

Bonds
Provided the RBNZ doesn't surprise today, NZ longer-dated yields likley to fall further following offshore trends

By Kymberly Martin

The short-end of the NZ swap curve was fairly steady ahead of this morning’s RBNZ meeting, but long-end yields followed offshore lower.

US 10-year yields have drifted down from 1.54% to 1.51%.

NZ 2-year swap closed for the day, unchanged at 1.96%. The market fully prices a 25 bps cut from the RBNZ today, whilst assigning a small probability of a 50 bps cut. It prices a trough in the OCR at 1.58% within the year ahead.

Our core view remains for 25 bps cuts today, and at the September and November RBNZ meetings. This would take the OCR to a trough of 1.50%. Consistent with this view we see NZ 2-year swap trading toward 1.80% in the months ahead.

Meanwhile, a continued downward drift in offshore yields is placing further downward pressure on NZ long-end yields. UK 10-year bond yields have traded to an historic low near 0.52% as the Bank of England attempts to purchase bonds at ever lower yields (recall the UK now has a lower sovereign rating than NZ).

German and US 10-year yields have also traded lower overnight. An auction of US 10-year Treasuries in the early hours of this morning attracted a solid 2.4x bid-cover ratio and a return of indirect bidders (a proxy for offshore participants including central banks). Accepted indirect bids stood at 72%, not far from the highs of the series. US 10-year yields have traded down to 1.51% this morning.

Yesterday NZ 10-year swap closed at an historic low of 2.41%. In the absence of any hawkish surprise from the RBNZ today, NZ longer-dated yields will likely feel further downward pressure from offshore trends today.

Daily swap rates

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Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA

 

 


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

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