NZ bond and swap yields push higher; OCR rate hike by year end almost guaranteed

NZ swaps closed up a further 5-8bps yesterday. NZ bonds yields rose 7bps. Overnight, US 10-year yields again failed to break higher.

The market has moved to almost price our own view of a first RBNZ hike in December. The market now prices a 90% chance to this outcome, and prices as much as a 50% chance of a hike by September.

Despite a better tone of NZ data of late, and risks from a bubbling housing sector we still see a first hike in September as a bit of a stretch.

The stubbornly high NZD is an important offset to pressures elsewhere for a higher OCR.

NZ 2-year swap closed the day at 3.00%, its highest level since April last year. Our end of year 2-year target remains 3.40%. The NZ 2-10s swap curve has steepened to 114bps.

Approaching 120bps we would look to re-position for flattening. We continue to see a 95-120bps range for the curve holding for much of H1 before a prolonged flattening then takes hold. This should see the 2-10s curve eventually bottom around 60bps next year.

Yesterday’s DMO auction attracted solid bidding at an average 3.7x bid-to-cover ratio. However, bids were fairly lacklustre relative to market pricing at the time. Bond yields closed up 7bps on the day.

Overnight, after weaker-than-expected Eurozone GDP releases, ‘safe haven’ German and US bonds attracted renewed demand. US 10-year yields fell back from 2.06% to sit at 2.02% this morning.

The domestic focus today will be NZ retails sales data (see above) Coming on the back of yesterday’s positive PMI and consumer confidence data a strong number could further boost markets’ OCR expectations.

Tonight, the key US data with potential to impact US yields will be the Empire manufacturing survey, industrial production and University of Michigan confidence.