NZ yields continue to fall; 2 year swap rate hits a new low of 2.70%

NZ yields continue to fall; 2 year swap rate hits a new low of 2.70%

Fixed Interest Markets by Kymberly Martin

NZ yields closed a little lower again on Friday, capping a remarkable week of declines. Overnight on Friday, “safe haven” US and German yields inched higher.

Swap yields declined a further 2-4bps along the curve on Friday. The short-end has now moved to discount almost 20bps of rate cuts in the coming year, and over a 30% chance of a cut at the next meeting. Last week, 2-year swap yields fell 24bps, closing the week at a new low of 2.70%. 10-year yields finished the week, down 20bps at 4.23%, resulting in a slight steepening of the 2s-10s curve to 153bps.The sharp fall in short-end yields saw NZ-AU 3-year swap spreads  decline from -95bps to -113bps over the week. However, the market still prices a hefty 157bps of rate cuts from the RBA in the year ahead.

Bond yields bobbed around on Friday, closing relatively unchanged on the day. However, the yield on NZGB21s closed down 27bps on the week, at 3.90%. As Australian equivalent yields have continued to decline the NZ-AU 10-year bond spread has narrowed to -9bps. NZ-US 10-year bond yields spreads are at 186bps.

Overnight on Friday, as market sentiment consolidated at low levels, US and German “safe haven” 10-year yields inched higher to 2.01% and 1.97% respectively. The yield on 10-year Italian bonds declined to 6.64%. It was rumoured the ECB continued it bond purchases in the secondary market.

In the lead up to the NZ general election on Saturday, it is a relatively quiet data week, locally. Tuesday’s RBNZ survey of expectations will importantly show if 2-year-ahead inflation expectations have dipped from the worryingly high level of 2.9% recorded in Q3. We will also get the release of US FOMC and Bank of England minutes this week. These should shed more light on the respective monetary policy paths in these two regions.

See our interactive bond rate charts here.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.

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