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The RBNZ's neutral stance to be tested as inflation signals rise. Markets mark down US yields as Trump stimulus plans start to look like just hot air

Bonds
The RBNZ's neutral stance to be tested as inflation signals rise. Markets mark down US yields as Trump stimulus plans start to look like just hot air

By Jason Wong

US Treasury yields are down 3-4 bps across the curve.

The 10-year rate drifted higher after the NZ market close from 2.48% to almost 2.50% as European rates moved higher, but then steadily fell as from the US market open and trades this morning at 2.42%, back into the bottom half of the well-established 2.30-2.60% range.

While two more Fed hikes this year are widely anticipated, lower rates for 2-years and beyond likely reflect reduced confidence in more stimulatory fiscal policy, given the political realities that Trump faces.

NZ rates treaded water yesterday, with a slight flattening bias evident in the swap curve. 

The fall in the 2-year swap rate is looking close to done for now and at sub 2.30% is getting closer to levels where we would recommend paying. Obviously, today will see downward pressure on rates, following the US move overnight.

Fair value for 2-year swap based on our expected OCR track (75 bps of hikes by the end of next year) is 2.29%, in line with the current rate, but as inflation reaches the mid-point of the target range and the question turns to the first tightening, payside pressure is expected to emerge.

The RBNZ is unlikely to capitulate on its neutral policy stance at tomorrow’s OCR Review, but its resolve to stay neutral will be tested as higher inflation data are released over coming months.

Daily swap rates

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


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

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