By Kymberly Martin
On Friday, NZ swap yields closed up across the curve with a notable steepening to the curve.
The 2s-10s curve finished the week at 101bps, having rebounded from around 94bps (also late July lows).
Tactically, we expect to see further steepening in the near-term.
This view is underpinned by
(i) potential corporate paying interest at the long end of the curve
(ii) technical support
(iii) the fact current curve flatness is well beyond fundamental ‘fair value’ (130bps)
(iv) stabilisation/rising US 10-year yields.
In this regard, Friday nights rise in US long yields was significant. US bonds sold off following the release of US unemployment data. US 10-year yields finished the week at 1.74%, up almost 15bps on the week. German ‘safe haven’ bonds also sold off, while peripheral European spreads narrowed by around 30bps.
Given the moves seen on Friday night, we expect NZ yields to open up today, with a steepening bias to the curve remaining.
NZ’s data flow also heats up a bit this week. On Tuesday we have the important Quarterly Survey of Business Opinion. A reading around last quarter’s (-4) would be consistent with our view of ongoing modest growth. On the same day the QVNZ housing report for September will also be released. This should retain enough steam to remain in the RBNZ’s view.
For now, the market continues to price around 70% chance of a 25bps RBNZ rate cut in the coming 6 months.
We do not expect cuts but a first hike at the end of 2013.
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