By Kymberly Martin
NZ swaps closed little changed yesterday. Overnight, US long yields broke below ranges to trade at 1.76%.
It was a fairly quiet day in NZ swap markets yesterday. Yields closed little changed, with 2-year remaining at 2.90%. The market prices close to a 60% chance of an OCR hike by March next year.
Ahead of the next RBNZ meeting (24 April) we see domestic data as likely to support the view of an economy making solid progress despite the negative impacts of the drought.
Short-end yields should be inclined to drift higher, in the absence of any negative global shock.
But there remains significant potential for an offshore shock. Last night, US weekly jobless claims showed an unexpected rise (385k vs. 353k expected). This saw US 10-year yields break below the bottom of the range they have traded since the start of year.
Yields now sit at 1.76%, some 30bps below their mid-March highs. Tonight’s US payroll numbers are now crucial to whether yields continue their downward path, or are able to snap back into range.
Yesterday, the NZ DMO’s auction of $200m inflation-indexed bonds attracted solid bidding with a 3.8x bid-to-cover ratio.
However many of these were ‘flyers’ well outside the range of successful bids. The market will now have its eye on the next NZGB offering which will likely come via the $2b syndication of new 2020 maturity bond.
Overnight, the Bank of England and ECB left rates unchanged as widely expected. ECB President Draghi struck a softer tone, acknowledging risks to the economic outlook remain to the downside.
He said the Bank stood “ready to act” and was “looking at various instruments”, but stopped short of directly pointing at rate cuts. He also took time to stress the Cyprus bailout should not be seen as a template for future bailouts.
Still, ‘safe haven’ German bonds rallied along with their US counterparts. 10-year yields now sit at 1.24%, back within a whisker of all-time lows reached mid-last year.
Expect the NZ curve to open under flattening pressure today given the decline in offshore long yields seen overnight. All eyes will then turn to tonight’s US payrolls.
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