By Kymberly Martin
NZ swaps yields closed down 1-4bps. The curve steepened. Overnight, US yields failed to break higher.
It was fairly passive in NZ swaps for much of the day. Then yields fell into the close after comments by RBNZ Governor Wheeler. Much of his commentary was directed at the ‘over-valued’ NZD.
In the context of discussing what can be done about this challenge, he mentioned “we will use the OCR as circumstances require”.
He also said the December MPS interest rate track showed the OCR to remain unchanged throughout 2013. This remains the Bank’s central tendency, though one thing that could impact on this was the exchange rate.
The market appears to have extrapolated that a persistently high NZD could result in the OCR being lower for longer. We do believe the currency provides one of the key downside risks to our own OCR trajectory of a first 25bps hike in December.
Wheeler also spoke of the intention to explore the scope for using macro-prudential tools to address unwanted heat in the housing market. If successful, this also suggests there could be less immediate need to raise the OCR.
The market now prices only 21bps of rate hikes in the year ahead, down from close to 30bps yesterday. 2-year swap closed at 3.01%. The 2s-10s curve has steepened to 117bps.
Yesterday’s LGFA tender went extremely well. There was an average 3.7x bid-to-cover ratio. The LGFA 19s were sold close to 10bps below prevailing market prices. By comparison, we expect demand at today’s DMO auction may be somewhat lacklustre, given the flurry of competing bond issuance coming to market recently.
Overnight, US 10-year yields again attempted and failed to break higher. After mixed US housing data releases, the US 10-year yields fell back from 2.05% to sit at 2.01%, ahead of the release of US Federal Reserve minutes early this morning.
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