As global yields rise, flowing through to our longer dated swap rates, NZDMO to launch a 20 yr bond to good support. RBNZ committed to using OCR cuts to boost inflation

By Kymberly Martin

NZ swaps closed up 3-4bps on Friday. Meanwhile long-end NZGB yields closed up 8-10 bps. On Friday night, core global 10-year yields rose by 4-7 bps.

It was a reasonably quiet end to the week for NZ swaps with limited domestic data releases. July’s net inward migration was a seasonally adjusted 5,600. This is off the all-time peak of 6,230 back in November. But recent data make it hard to conclude the trend is clearly downward. This is likely to have little direct impact on the RBNZ’s thinking on monetary policy. But it will remain one component of the Bank’s considerations on house prices pressures. It remains committed to addressing these with further macroprudential tools, under its financial stability mandate.

At the end of the week the market had taken the RBNZ at its word and priced only a 20% chance of a September rate cut, but was close to fully pricing a November cut. Thereafter it is close to fully pricing a second cut by mid next year, to take the OCR to 1.5%. We believe if the Reserve Bank remains committed (as it appears) to trying to soon return CPI inflation to its 2% target, it will have little choice but to keep cutting the OCR, to at least 1.5%. This week we expect short-end yields will consolidate in the backdrop of limited domestic data releases.

The longer-end of the NZ swap curve will continue to be impacted by offshore moves. In this regard, Friday night’s sell-off in core global bonds was notable. US, German and UK 10-year yields all rose by 4-7 bps, with the largest moves from UK Gilts. US 10-year yields ended the week just below 1.58%. These moves should exert some upward pressure at the long-end of the NZ curve at the open this morning.

On Friday, the NZDMO announced the syndicate for the launch of its new NZGB 2037. Precedent suggests the bond should be launched in coming days. In anticipation, longer-dated NZGBs sold-off sharply on Friday afternoon. Some upward pressure on yields may remain. However, we are confident fundamental supports for NZGBs will be intact after the congestion caused by the new issue has worked its way through the system.  These include limited sovereign risk, constrained supply and an easing RBNZ.

There is little to note on the offshore calendar tonight. More broadly the market will be looking through a smattering of data this week to Fed Chair Yellen’s weekend speech at the Jackson Hole symposium.

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