By Kymberly Martin
It was a fairly turbulent day in NZ markets yesterday. Initially, short-end swap yields tumbled 10bps after a more dovish RBNZ statement.
In its MPS the RBNZ made little change to its projected 90-day bank bill forecasts (while leaving the current OCR unchanged).
The first implied OCR hike remains sometime in late H1 2014. However, the RBNZ’s overall tone was more dovish. It also appeared to purposely lean against the recent move by markets to price an OCR hike by year-end, saying; ‘At this point we expect to keep the OCR unchanged through the end of the year’.
As a consequence, we have pushed back the start of our expected rate hiking cycle to Q1 2014, from our long-held view of a December 2013 hike.
However, our biggest divergence with the market (and indeed the RBNZ’s projections) remains the extent of OCR tightening we see once hikes do eventually get underway. We continue to expect a steady ’normalisation’ of the OCR, to a 4.50% peak by mid-2015.
In the afternoon, NZ yields then bounced off their lows, assisted by stronger-than-expected AU employment data. This saw 2-year swaps close down only 5bps on the day, at 2.90%.
The 2-10s curve was around 7bps steeper at 128bps. We do not see this as the start of a steepening trend. We see flattening back into long-held ranges as more likely in the weeks ahead.
As we have argued previously, we think yields will be higher by year-end, and dips along the way will be shallower. Previous lows are unlikely to be revisited. The 20bps decline in 2-year swap since mid-February should therefore be assessed as a hedging opportunity.
Yesterday, the NZ Debt Management Office announced it is to issue a new 2020 maturity bond in April, under syndication. Timing will coincide with the maturity of the 15 April 2013 bond. For today, the DMO auctions $100m of NZGB19s and $100m of NZGB23s.
Overnight, in the backdrop of fairly buoyant equity markets, US 10-year bonds traded a familiar path. Yields pushed up to 2.06% before returning to 2.03% this morning.
Today, the NZ PMI will be released which we expect to remain in expansion mode (previously 55.2).
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