By Kymberly Martin
NZ yields closed lower and curves steeper on Friday.In the aftermath of Thursday’s weak NZ employment report, NZ yields continued their pull-back on Friday.
2-year swap yields are now back at 2.68%. The market now prices more than a 60% chance of a 25bps RBNZ cut by year end. We do not expect a cut.
The swap curve continued its recent sharp steepening as long-end yields fell by less than the short-end. 10-year yields closed down 5bps, at 3.80%, taking the 2s-10s swap curve to 112bps. We see room for a little more steepening. However, any pull-back in US long bond yields would likely put the brakes on the steepening of the NZ curve.
On Friday night, US 10-year yields pulled back from previous day highs, above 1.72%, to close around 1.66%.
US Treasury yields have moved higher in recent weeks on the back of a slightly better tone of US data, less speculation of monetary stimulus and diminished demand at debt auctions.
For yields to continue rising this week, US data will need to continue avoiding disappointment.
Locally, tomorrow’s retail sales have the greatest potential to stem the current cautious mood on the NZ economy.
However, for the moment, the path of least resistance for yields seems to be lower. We eye support for 2-year swap just below 2.55%.
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