By Kymberly Martin
NZ markets were relatively quiet yesterday in the absence of any local data releases. Swap yields closed up 2-3bps across the curve. The 2s-10s curve steepened a fraction to 102bps.
However, across the Tasman short-end yields continued to decline by about 7bps. The market now looks for more than 90bps of further RBA rate cuts in the year ahead. It assigns an 80% chance of a 25bps cut at the next RBA meeting. This has taken NZ-AU 3-year swap spreads up to -15bps, their highest level since 2009.
We think this spread will ultimately move into positive territory. By early 2014, on our forecasts the RBNZ cash rate will move above the RBA’s.
It is worth bearing in mind that since inception the RBNZ OCR has sat at 40bps above the RBA equivalent on average.
Overnight, as the Eurogroup of finance ministers launched their meeting in Luxembourg market sentiment soured a little.
The market awaits headlines of progress, and Chancellor Merkel’s visit to Greece tonight, for the first time since the start of the crisis.
‘Safe haven’ German 10-year bonds recovered from the previous day’s sell-off. Yields declined around 5bps. The US bond market was closed for the Columbus Day celebration.
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