By Kymberly Martin
There was another reasonable sell-off in NZ bonds and swaps yesterday.
The NZ moves in followed the previous day’s test by US 10-year bonds of the 2.25% level.
NZ swaps closed up 2-7bps with a clear steepening in the curve. Heading into today’s RBNZ meeting, 2-year swap at 3.02% remains at the upper-end of its year to date range.
The 2-10s curve has steepened a little further, within its range, to 120bps.
The rise in swaps is being helped by hedging (paying) interest from the ‘real’ economy via small and medium-sized businesses. In particular this is resulting in paying at the mid part of the swap curve.
NZ bond yields closed up 4-9bps. The yield on NZGB23s closed at 3.73%, its highest level since late March. NZ-AU and NZ-US 10-year spreads now sit at 24bps and 167bps respectively.
Heading into today’s RBNZ meeting the market prices around 35bps of rate hikes by this time next year. We see the OCR 50bps higher by 12 months’ time, after a first 25bps hike in March next year.
In the RBNZ Governor’s, recent speech of 30 May, he outlined concern about hiking the OCR as it would send the currency higher, but reticence to cut because it would create a bigger housing bubble than we’re already facing.
With this in mind, we can probably expect to see another reticent MPS today, with plenty of ifs ‘buts’ and ‘maybes’. Bear in mind the March MPS had a first OCR hike implied for Q3 2014, and a 3.50% OCR by end-2015.
However, if we do a stock-take of all that’s changed since the last MPS, almost every piece of data and news has been at least as strong as the Bank expected, and in many cases substantially stronger.
This has conspired to push market expectations (and short-end swaps) higher. With quite a lot now priced by markets, over the coming year, the RBNZ will be unlikely to want to push these expectations higher. This is particularly the case, as despite the 7% fall in the NZ TWI since mid-April, the Bank would still prefer to see a lower currency.
Overnight, US 10-year yields consolidated around the 2.20% level, in the absence of key global data developments.
Today, it will be all about the RBNZ meeting (9.00am NZT).
Across the Tasman employment data will be released as a key input to any future RBA decision. Currently the market prices close to a further 35bps of cuts from the RBA.
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