NZ yield curve expected to steepen after US Non-Farm payrolls came in above expectation and US 10-year yields shot to almost 2.75%

By Kymberly Martin

It was a fairly quiet day in NZ markets on Friday ahead of the much anticipated US payrolls report. In the event, payrolls came in above expectation and US 10-year yields shot to almost 2.75%.

NZ 2-year swap closed the week at 3.29%. The market now prices close to 70bps of rate hikes from the RBNZ in the year ahead, which is aligned with our own forecasts.

However, we believe the market still under-estimates the pace of OCR increases in the coming 2-years. We see 200bps of hikes from the historic low of 2.50%. The market currently prices 150bps.

We therefore continue to see value in hedging rate risk over a 2-5 year time horizon.

We continue to see persistent paying pressure in the NZ mid-curve that has pushed 5-year swap above 4.0%, its highest level since September 2011. The 2-10s curve closed the week at 135bps.

However, developments in the US on Friday night will likely see the curve open steeper today.

US long yields gapped higher in response to Friday’s payrolls data, dragging many of their offshore counterparts with them.

US 10-year yields closed at their highest level since August 2011. AU 10-year bond futures closed down 17bps, back at their lows of a fortnight ago.

Expect NZ long-end bonds and swap to open at new highs for this cycle today. The NZ 2-10s swap curve may also revisit its June highs above 140bps.

The domestic highlight of this week’s local data will be tomorrow’s Quarterly Survey of Business Opinion. This will likely tell a now familiar story of broad-based strength. It will offer nothing to challenge current upward momentum in market pricing for the OCR.

Later in the week the US Fed will be back in the spotlight with the release of June Minutes. Today, there is little on the domestic data agenda as the market absorbs Friday’s payrolls data.