By Kymberly Martin
It was a quiet day domestically, with NZ swaps closing up 6-7bps on thin volume.
2-year swap is back close to its highs for the year at 2.23%. The 2-10s curve is fractionally steeper at 134bps.
NZ bonds also closed up 4bps across the curve. The yield on NZ 10-year bonds now sits at 4.17%. This is a spread to US and AU equivalents of 169bps and 35bps respectively.
Overnight, equities rallied and credit spreads narrowed. Sentiment was helped by positive surprises on PMI Manufacturing readings on both sides of the Atlantic.
‘Safe haven’ German and US bonds initially sold-off, but found support late in the evening.
US 10-year yields however, failed to break above 2.55%, returning to trade at 2.48% this morning.
Markets are likely wary of extending positioning ahead of the all-important US payrolls data at the end of week.
Today, the local focus will be on the RBA’s rate decision. The market prices around a 20% chance of a cut at the meeting. We do not expect a cut although we expect the RBA to maintain an easing bias.
Non-delivery of a cut today could see a knee-jerk rise in AU short-end yields narrowing NZ-AU swap spreads.
However, by end of year, as we approach the RBNZ’s tightening cycle we see NZ-AU 2-year spreads moving beyond 50bps (currently 37bps).
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