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UK Brexit woes push rates higher there, and the contagion extends to Germany. NZ swap rate rises may pause, especially if US rates hold

Bonds
UK Brexit woes push rates higher there, and the contagion extends to Germany. NZ swap rate rises may pause, especially if US rates hold

By Jason Wong

It was a quiet start to the week with US (bond market) and Japan closed for public holidays.

European rates continue to push higher, with the UK 10-year rate breaking up through the 1% mark.

GBP’s free-fall and the prospect of more downside risk have added an inflation premium to UK bond yields. The UK’s woes have spilled over to Germany’s bunds market. Germany’s 10-year rate rose by 3 bps to 0.05%.

In the local market yesterday there were only modest changes in rates.  The 2-year swap rate was flat at 2.085% and 10-year swap was up 1 bp to 2.63%.

The RBNZ’s McDermott gives a speech at 4pm today titled “Understanding low inflation in New Zealand”.  It shouldn’t be market-moving, but there’s always the chance of the market misinterpreting the message. The market currently prices in a 68% chance of the RBNZ easing in November and around a 1.7% trough in the OCR by the middle of next year.  This is broadly consistent with the Bank’s last policy guidance that further easing “will” be required.

We see NZ 2-year swap in the process of bottoming, but unlikely to surge higher any time soon, with the RBNZ maintaining a bias to ease further and any potential rate hikes in the distant future.

Receivers of NZ long-end swaps may return this week, now that yields are flirting with range highs.  A potential reversal of US 10-year rates, after reaching a 4-month high late last week, would be a supporting factor.

NZ’s 10-year government bond rate fell by 1.5 bps to 2.48%, with the softer US employment report on Friday night helping.  We continue to see solid fundamental supports for NZGBs but some risk this week. The NZGB curve risks contagion from across the Tasman if the Australian government bond curve steepens further, ahead of the syndication of a new 30-year issue this week.

Daily swap rates

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Source: NZFMA
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Jason Wong is on the BNZ Research team. All its research is available here.

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