By Kymberly Martin
NZ swaps closed down 2-3bps yesterday, after the low-side Q3 GDP reading (0.2% vs. 0.5% expected). Short-end yields were quickly knocked lower on zero volume.
However, the market failed to push on, and paying interest at the longer end of the curve resumed later resulting in slight curve steepening on the day.
The market now prices around a 50% chance of an RBNZ cut by mid next year. We do not expect a cut. 2-year swaps closed comfortably within their well-established range, at 2.72%.
The 2s-10s curve closed at 110bps, approaching levels (115bps) that we would re-position for flattening.
Yesterday’s DMO auction attracted a solid average bid-to-cover ratio of 3x. However, there was a wide range of successful bids, with some being well wide of market pricing at the time.
Overnight, markets seemed to have slipped into Christmas mode early, showing very little pulse. US 10-year bonds yields bobbed around 1.79% despite US data being generally much stronger than expected. Offsetting this fiscal cliff negotiations appear to have stalled.
In the day ahead the market will keep its eye on US fiscal cliff headlines in the countdown to the Jan 1 deadline. If no deal is reached, $600b of automatic tax increases and spending cuts will kick in.
There are no NZ data releases of note today, so expect NZ interest rate markets to end the week with a whimper rather than a bang.
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