NZ bond market yields up, dragged higher by rise in Australian bond yields

by Kymberly Martin

There was a gentle further rise in NZ yields yesterday. Early this morning, the FOMC statement pushed out the probable starting point for US rate hikes to late 2014.

Yesterday, NZ swap and bond yields closed up 2-4bps across the curve. The yield on 2-year swaps inched up to 2.86% and that on 5-year to 3.47%. Swap bond spreads remain comfortably below 30bps, with 10-year EFP at 28bps.

In NZ bond markets, yields closed up 3-4bps, dragged a little higher by the rise in Australian bond yields.

AU 10-year bond yields rose around 8bps, to almost 4.00%, after the AU CPI release. The market focus was squarely on higher than expected underlying inflation. However the market continues to price almost 100bps of cuts from the RBA in the year ahead, expectations we believe are too aggressive.

We expect a further rate cut from the RBA in early Feb, taking its cash rate to 4.00%.

US 10-year yields dipped ahead of the FOMC announcement early this morning from 2.07% to 2.01%. The Fed’s dovish statement (see majors) then saw US 10-year yields fall further to around 1.94% currently, though still comfortably in the middle of recent ranges.

The Fed’s policy of keeping rates exceptionally low, and to continue extending the duration of its securities holdings will likely see US long yields stay low for some time. This will occur despite some broader improvement in US economic data in recent months. In turn, this will keep NZ long-end yields lower than local fundamentals would dictate.

Today’s local focus will be the RBNZ meeting. We expect the RBNZ will once again play a fairly steady hand. It will likely continue to suggest medium-term tightening bias, but acknowledge the recent welcome fall in recorded inflation, and ongoing global uncertainty.