By Kymberly Martin
NZ swap yields closed a couple of bps lower again yesterday. Currently markets price around an 80% chance of an RBNZ rate cut in the coming 12 months. This is not unreasonable as an insurance policy.
However, if markets move to price 25-50bps of cuts, representing a more central view, we would see this as an opportunity to pay short-end swaps.
This suggests paying 2-year swaps at around 2.55% (currently 2.63%), but keeping stops tight. If sentiment toward Europe deteriorates rapidly, the market could then push on to price up to 50bps of RBNZ cuts, taking 2-year back to early June lows around 2.35%.
We believe however, that the threshold for further RBNZ rate cuts is still fairly high (inflation and house price pressures are simmering). We would therefore once again be looking for opportunities to pay. We also look to pay 10-year swap at 3.60% (currently 3.68%)
The DMO bond auction yesterday attracted solid interest at almost a 3x bid-to-cover ratio. Afterward bonds rallied into the close, closing down 3-7bps.
A slightly better tone pervaded markets overnight. Italy managed to sell 10-year bonds at a yield of 5.24%, down from 5.82% on similar maturities at the end of August. German ‘safe haven’ 10-year bonds paddled sideways at 1.46% and peripheral European spreads tightened slightly.
US 10-year yields crept up from 1.62% to 1.64%. With the slightly better European sentiment the market was prepared to overlook some less than impressive US data results.
Today, credit aggregates will be published in NZ along with private sector credit data across the Tasman.
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