By Kymberly Martin
Similar themes played out in NZ swaps and bonds yesterday. Yields were higher and curves steeper.
NZ yields opened higher, following the rally in “risky assets” on Friday night after the EU summit announcements. Swap yields made intra-day highs before slipping a little in the afternoon. Still, 2-year yields closed up 6bps and 10-year up 10bps, at 2.80% and 3.91% respectively.
Current 1 to 5-year swap yields are consistent with: an OCR that remains at, or below current levels until late 2013; is only 75bps higher than current in three year’s time; and peaks around 3.75% in late 2016. Our own forecasts are for a somewhat steeper rate hiking path.
Still, we think the near-term debate will focus on the probability of the market returning to price OCR cuts. History shows that global optimism related to the EU usually fades quite rapidly. When it does, NZ rate hike expectations receive a battering. However, we would see any consequent dip in swap yields as an opportunity to hedge interest rate risk.
After a harsh flattening last month, the curve appears to be finding a plateau. The 2s-10s swap curve steepened 4bps yesterday to sit around 111bps.
Overnight, offshore yields navigated the release of expectedly lacklustre European manufacturing data. The negative surprise came later with the release of the US manufacturing ISM (49.7 vs. 52.0 expected). This saw “safe haven” US and German 10-year bond yields slip 4bps to 1.58% and 1.52% respectively.
After yesterday’s large moves, expect some consolidation in yields today, with the risk of some pull-back given the more muted tone in markets overnight. Across the Tasman, all eyes will be on the RBA announcement at 16.30 (NZT). We and consensus expect no change though the market prices a small chance of a 25bps cut.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.