US 10-year yields fell on the release of weaker-than-expected U.S. Q4 GDP

By Kymberly Martin

NZ short-end swap yields slipped back a fraction yesterday. 2-year at 2.88% seems reluctant to break above the top of its 2.50-2.90% range ahead of today’s RBNZ meeting.

The RBNZ’s statement is expected to be balanced with no intention of influencing current market pricing (10% chance of a cut by mid-year, 35% chance of a 25bps hike by year end).

But the risk is that markets latch onto any hawkish strains, pushing yields higher. Beyond this, we still see plenty of opportunity for yields to be knocked lower, not least if current elevated global sentiment fades.

Ultimately we see a first 25bps hike from the RBNZ in December and 2-year yields at 3.40% by year end.

NZ bonds were fairly quiet yesterday. This week’s DMO tender will be on Friday. It will be the last auction of nominal bonds for two weeks, as $200m of inflation-indexed bonds will be issued next week.

Offshore yields continue to be the key influence on the long-end of the NZ curve. Overnight, US 10-year yields initially fell on the release of weaker-than-expected US Q4 GDP (-0.1% vs. 1.1% expected). Still, it seems apparent weakness was distorted by one-offs.

US 10-year yields soon returned to trade at 2.01%, ahead of this morning’s FOMC meeting.

There is potential that a dovish statement will cause yields to, at least temporarily, pull back from nine month highs.

Still, how yields end the week will be dependent on Friday’s all-important payroll data. It will be increasingly difficult for Fed Chairman Bernanke to talk down US yields if labour data begins to show consistent improvement.

Yesterday’s strong ADP employment report (despite being revision prone) suggests upside risk to consensus expectations of 164k payroll addition on Friday.