By Kymberly Martin
The NZ swap curve steepened slightly yesterday. 2-year swaps maintain trading around 2.89%, but 10-year closed 4bps higher at 3.95%.
The market continues to price around a 60% chance of an OCR hike by March next year.
We see little in data ahead of the 24 April RBNZ likely to cause the market to reduce these expectations.
Next week’s BNZ PSI should remain firmly in expansion, Q1 CPI data should confirm inflation bottomed in 2H last year (we expect a 1.0%y/y outcome), consumer confidence should remain fairly resilient and house prices buoyant.
We maintain our central view of a 25bps OCR hike in March next year, though we see risks of an earlier or later start as evenly balanced.
Given near-term tight supply demand dynamics for NZ bonds, swap-bond spreads have broken higher. This has taken them out of ranges that had contained them for the past couple of years.
But at current levels we would caution against getting too carried away by current tight NZGB supply-demand dynamics. We do see these easing.
For the 10-year swap-spread (currently 60bps) to move toward 2007 levels (above 100bps) would likely take real NZGB shortage (Government surplus); an aggressive tightening cycle, with associated flattening of the swap curve that would prompt strong demand to pay long-end swaps. We do not see either of these events as imminent.
Yesterday’s weaker than expected AU unemployment data saw the market increase expectations for RBA cuts in the year ahead. The market now prices 28bps of cuts.
Consequently, NZ-AU swap spreads have rebounded. Ultimately we see these spreads moving well into positive territory later this year, as we approach RBNZ rate hikes, and the RBA delivers further cuts.
Overnight, US 10-year yields slipped a fraction to trade at 1.79% this morning. Key to US yields tonight will be the release of March advance retail sales data. University of Michigan consumer confidence will also be released.
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1 Comments
Given near-term tight supply demand dynamics for NZ bonds, swap-bond spreads have broken higher. This has taken them out of ranges that had contained them for the past couple of years.
I blame the lack of inter-institution communication.
The RBNZ scooped up ~$5.0 bn of the 2013s while the NZDMO was busy reducing outstanding T Bill issuance from ~$10.0 bn to $5.00bn. - not much liquidity management paper to play with - a natural movement out along the curve should have been foreseen - more so if relationships with G3 central banks were better developed.
The loss blowout in Local Authority higher interest rate hedge programmes must be astronomical - an Auditor-General investigation is mandatory in the face of such gross interest rate management incompetence undertaken by council officers and their advisors/bankers.
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