Fears of a Spring slowdown in US growth diminish, US long bonds look likely to extend their sell-off

By Kymberly Martin

Following Friday’s moves offshore, NZ swap and bond yields closed up 3-6bps across the curve yesterday.

2-year swap closed inside its range of the past two months, at 2.83%.

The 2-10s curve has steepened off its lows, to sit at 97bps. We expect further steepening within the 95-125bps range we anticipate holding for much of the year.

However, we expect a prolonged flattening to take place through 2014, as OCR hikes get underway.

NZ bond yields closed up 4-5bps across the curve yesterday. We continue to see long-end bonds as expensive in outright terms and relative to swap and offshore counterparts.

NZ 10-year swap spreads have pulled back from recent highs but remain elevated at around 59bps.

Overnight, in fairly quiet market trading, US 10-year yields extended Friday’s rise, to sit around 1.77% this morning. As fears of a Spring slowdown in US growth diminish, US long bonds look likely to extend their sell-off.

Initial support for 10-year bonds is seen when yields reach 1.85%. With a lack of key US data releases this week, the path of least resistance for yields is likely higher. This should assist NZ curve steepening.

Across the Tasman, the RBA will announce rates today. The market is around 50% priced for a cut, meaning a market response is likely whatever the outcome.

If a cut is not delivered today, the market will dissect accompanying comments to assess whether it is appropriate to simply push-out rate cuts expectations to future meetings.

The market currently prices around 55bps of RBA cuts in the year ahead.