NZ yields down slightly as Euro "reality" kicks in; market expecting RBA to cut today

Fixed Interest Markets by Kymberly Martin

NZ yields inched lower over the course of the day as some of the European euphoria dwindled.

As global risk appetite cooled, NZ swap yields closed down 4 to 5bps yesterday across the curve. 2-year yields closed at 3.15%, a familiar level over the past month. The market continues to look for just under 40bps of rates hikes from the RBNZ in the coming year. 10-year swaps closed at 4.73%, with little change in the 2s-10s spread.

Bond yields also crept lower. The yield on 13s closed at 2.79%. The yields on 21s closed just under 4.50%. As Australian 10-year bonds also enjoyed a similar rally, the NZ-AU 10-year yield spread remains close to zero. The near-term risk remains tilted toward NZ 10-year yields rising relative to Australian.

Overnight, as global risk aversion increased, demand for “safe haven” government bonds picked up. US 10-year yields declined steadily from 2.30% to 2.18%. German 10-year yields descended from 2.20% to 2.03%. Italian yields remained hovering above 6.00%. Spreads to German bunds also widened for French government bonds.

The RBA rate decision will be key to watch today. The market is pricing over an 80% chance of a 25bp rate cut today and over 100bps of cuts in the year ahead.

If the RBA delivers on the rate cut expectations today, it could jolt the market into revising down expectations for RBNZ rate hikes. NZ still stands out amongst its global developed market peers, as the only nation where rate hikes are expected in the year ahead.

We believe RBNZ rate hikes will ultimately be delivered, and more than the market currently expects. However, a near-term downward revision is possible, given the proximity of the two neighbours and easing in AU and NZ inflation indicators in recent weeks.

See our interactive bond rate charts here.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.