Markets push back chance of September rate rise as yields push higher, but Wall Street moves may take upward pressure off today

By Kymberly Martin

NZ swaps closed up 3-5 bps yesterday. Long-dated NZGBs have continued their sell-off. Yields have risen a further 8-9 bps.

In a quiet start to the local data week, NZ swaps pushed higher, taking their cue from Friday night’s rise in offshore yields. NZ 2-year swap closed at 2.0%. The market now prices less than a 20% chance of a September RBNZ rate cut and a trough in the OCR at 1.57% within the year ahead.

We continue to see the prospect of 25 bps rate cuts at the November and February meetings, taking the OCR to a trough of 1.50%. We therefore remain alert to opportunities to receive February OIS or 2-year swap. However, we think better opportunities may arise in coming weeks, potentially after the release of Q2 GDP and the RBNZ’s September meeting.

NZGB yields pushed higher, with a notable steepening of the curve yesterday. The catalysts were two-fold. First, they followed the sell-off in global bonds on Friday night. Second, long-end bonds continued to sell-off in anticipation of the new NZGB 2037 that we anticipate will be launched in coming days. As investors make room for the new bond, NZGB 2027 and 2033 yields have risen a further 8bps and 9bps respectively.

NZGB 2033 yields have now risen 18 bps since late last week. However yields are still only at late-June levels. 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. Supports include the unusual global backdrop of depressed yields, plus the compelling NZGB story (low sovereign risk, constrained supply and an easing RBNZ).

US 10-year yields traded lower overnight along with a decline in the global oil price, in what was otherwise a fairly quiet night. US 10-year yields traded down from 1.59% to 1.54%. This will help to offset any further upward pressure at the long-end of the NZGB curve today.

This morning, look out for a speech by RBNZ Governor Wheeler to be released on the Bank’s website, titled; “Monetary policy challenges in turbulent times.”

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