Market pricing in around 5 bps of rate hikes from RBNZ over next 12 months

By Kymberly Martin

It was a fairly quiet day for NZ swap and bonds yesterday. Overnight, markets were also relatively subdued as the US celebrated Independence Day.

NZ swap yields closed flat to slightly up yesterday. The yield on 2-year swaps now sits at 2.83%, not far from key resistance levels. It would take a definitive break above these levels to open the next leg up in yields toward 3.20%.

For now, we see the greater risk that yields receive a set back from a souring in global sentiment. Friday’s US payrolls number stands out as the key risk event to navigate this week. Tonight, expected policy action by the Bank of England and ECB should keep markets buoyant, underpinning NZ yields.

NZ short-end swap yields continue their relentless march higher relative to AU equivalents, as the market revises relative expectations for central bank activity. The NZ-AU 3-year swap spread has moved from - 120bps in March to around - 47bps currently.

The market now prices around 5bps of rate hikes from the RBNZ in the year ahead and 70bps of rate cuts from the RBA. We think both expectations will ultimately be revised up.

NZ bond yields closed up around 3bps across the curve. At 3.59%, the yield on NZ 10-year bonds sits 39bps above AU equivalents. It is comfortably in the middle of its new, higher range since April.

The NZ DMO announced the tender for today at 125m of 19s and 125m of 23s. Demand should be solid.

Overnight, in the backdrop of fairly tepid European Services PMI data there remained a bid tone for German bunds. The yield on 10-year bonds drifted down from 1.54% to 1.45%. Non-core European spreads pushed a little wider.

Expect a relatively quiet day in NZ markets today, ahead of the Bank of England and ECB announcements tonight.