Market pricing in a very small chance of RBNZ rate cut tomorrow

Market pricing in a very small chance of RBNZ rate cut tomorrow

Fixed Interest Markets by Kymberly Martin

NZ yields inched a little lower again yesterday, after the rating agency S&P announcement that it had placed 15 European sovereign’s on negative watch. Overnight, markets were relatively stable.

NZ swap yields declined by 2-5bps across the curve yesterday, as risk appetite waned after the S&P announcement. The 2-year yield closed 4bps lower as the market tweaked down its expectations for the OCR outlook.

The delivery of a 25bps rate cut from the RBA also likely prompted the market to make slight adjustments to its NZ rate expectations.  A very small chance of a rate cut at the RBNZ meeting on Thursday is now priced.

The RBA rate cut had mostly been priced by the market. However on delivery AU swap yields gapped lower. They soon stabilized, clawing back their fall, to close just 4-5bps lower. NZ-AU 3-year swap yields remain in familiar territory at -95bps.

The RBA statement emphasized the risk of European problems spilling over to Asian growth that is already seen slowing. The cut was an insurance measure. The RBA explicitly said that rates are now at neutral. Our NAB colleagues expect one further 25bps cut in February, with the RBA on hold thereafter.

In NZ bond markets there was very little action. Yields closed down 1-2bps. NZ-AU 10-year bond spreads remain comfortably around 10bps.

Overnight, market moves were relatively uneventful for a change. The US 10-year yield hovers just under 2.06% and German equivalents just under 2.20%. Peripheral European yields were relatively stable after their recent plunge.

Assuming no wild card headline from Europe (a brave assumption), NZ yields should be relatively range-bound today, ahead of tomorrow’s RBNZ meeting. We expect the RBNZ to remain on hold at 2.50%, highlight global risks, but reiterate a medium-term tightening bias.

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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