Longer term swap rates take a chunky fall. Attention now turns to RBNZ MPS. Observers see the RBNZ resistant to signaling a higher rate track in the outer period

By Jason Wong

US 10-year Treasury yields have traded in a 2.37%-2.44% range and currently sit near the bottom at 2.38%, about 1bp lower relative to trading at the NZ close.

Yesterday, the local market saw a significant curve flattening, with global forces driving down longer term rates, while the short end was pinned by the rise in NZ inflation expectations.

The 2-year swap rate rose by half a basis point to 2.415%, while the 10-year rate fell by 6.5 bps to 3.52%. The 10 year NZGB rate fell by a chunky 8 bps to 3.305%.

The economic calendar over the next 24 hours is very light with nothing of note. The NZ market will be focused on the RBNZ's MPS tomorrow morning at 9am.

The time gap between this first monetary policy announcement of the year and last November’s MPS is large. Plenty has happened in the interim. This provides scope for market reaction, given the various moving parts.

OIS pricing shows little prospect of any OCR adjustment in the first half of the year, while the market toys with the prospect of a rate hike by year-end.

The market won’t be surprised with a dropping of the RBNZ’s easing bias and lifting of the near-term OCR track from 1.7% to 1.8% as a result of that (assuming the Bank adopts the Swedish rounding system).

But there is some debate on whether or not the Bank will show some lift in the OCR profile in the outer period (beyond 18-24 months), compared to the November track of a completely flat track.

What we can be more sure of is that the RBNZ will in no way sanction current market pricing on rates, which sees a tightening this year and a series of hikes beyond that.

The RBNZ could well escalate its rhetoric on discomfort with the NZD. We would recommend buying any NZD dip if the market over-reacts to such NZD-rhetoric.

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