By Kymberly Martin
NZ swap yields continued their path of least resistance (higher) yesterday, closing up 2-3 bps.
The market now prices 27bps of RBNZ rate hikes in the coming 12 months. We expect 50bps.
2-year swap yields closed the day at 3.04%, their highest level since early April last year. Based on our OCR trajectory (that sees steady hikes next year, to a 4.50% peak in 2015) ‘fair value’ for 2-year swap is currently 3.40%.
Still, to get yields to this sort of level near-term would likely take one of a few things: First, significant further positive data surprises. Nothing stands out as an immediate candidate; Second, very hawkish rhetoric at the next RBNZ meeting on 14 March. Possible, though likely more balanced; Third, a real surge in ‘fixing’ activity from the residential/business sector. Yet to be seen.
For now, we still see the potential for some dips in yield on the way to much higher yields by year-end. These should be assessed as hedging opportunities.
NZ bonds were very quiet yesterday. However, the LGFA (local government funding agency) announced the details of its 10th tender to be held tomorrow.
$205m of LGFA 19s and $45m of LGFA 17s are being offered. We expect demand to be solid from domestic participants and a growing offshore investor base. The 2019 bonds still offer a 95bps yield pick-up to NZGB equivalents.
There are no domestic data releases today. Across the Tasman, RBA minutes will be released. These will be important for informing rate cut expectations. Market pricing currently stands at -33bps for the year ahead.
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