Market pricing in 80% chance of OCR being 25bps higher in 12 months’ time; highest expectation since April 2012

By Kymberly Martin

NZ swaps closed up a further 3-4bps. Overnight, US 10-year yields attempted another assault on the 2.0% level.

Since early December, NZ short-end swap yields have stealthily moved 40bps higher. 2-year swaps have moved from 2.55%, to close at 2.95% yesterday.

While a return to the December bottom of the trading range now looks less likely, it is difficult to see the imminent catalyst for a significant further rise in yields. But complacency should be avoided.

The market now prices an 80% chance of the OCR being 25bps higher in 12 months’ time. This is the highest expectations have been since April last year.

We continue to expect a first hike in December, with steady hikes throughout 2014. We see a 4.50% peak in the OCR in early 2015.

The 2-10s swap curve has steepened a little further to 113bps. Save a surge higher in US long-yields (that would drag up NZ long-yields) we would look to reposition for curve flattening as we approach 120bps.

Overnight, US 10-year yields attempted another break higher, this time touching above 2.02% before slipping back to 2.0%.

Today’s BNZ PMI will be released. December’s reading inched up to 50.1. A reading for January above 50 would show the manufacturing sector remains in expansion despite currency headwinds.