Positive US housing data and upbeat sentiment has NZ-US 10-year spreads at lowest point since June

By Kymberly Martin

NZ swap yields rebounded 4-6bps across the curve yesterday, largely in sympathy with moves see in US and AU yields.

From the open, NZ yields moved higher, though later in the day some receiving interest re-appeared.

This dragged 2-year swap 2bps lower, into the close at 2.54%. The market now prices around 30bps of RBNZ rate hikes in the year ahead. It assigns close to a 50% chance of a 25bps cut by year end. We believe this is unlikely.

The 2s-10s swap curve continues to steepen and is now at 107bps. We continue to target above 115bps as a level to take profit. We see the long-end of the NZ curve being dragged higher by moves in offshore yields.

In this regard, US 10-year yields marched higher overnight. Generally buoyant equity markets and positive US housing starts data dampened demand for ‘safe haven’ US Treasuries. 10-year yields surged from 1.72% to 1.79%.

Technically, September highs around 1.90% are now eyed. A break of this level opens the way for a rise to 2.0%. We continue to believe that US 10-year yields will trade in a range with higher highs, and higher lows. For today, the overnight move should add further steepening pressure to the NZ curve.

The NZ DMO announced its tender for today at $100m of NZGB15s and $150m of NZGB23s. Demand for 23s at auction is likely to be limited by current fairly depressed spreads to US equivalent bonds.NZ-US 10-year bond spreads currently sit at 170bps, their lowest level since June.

The key data for US yields tonight will be the Philadelphia Fed business survey. Consensus expects the diffusion index to continue its current upward trend, into positive territory. If so, this should keep upward momentum in US 10-year yields intact.