NZ 10-year government bonds yielding above 4.4% and should begin to appear attractive relative to Australian and US equivalents

By Kymberly Martin

The NZ market showed a predictable response to Friday night’s offshore moves. NZ swaps closed up 6-12 bps across the curve.

The 2-10s swap curve revisited mid-June highs, closing at 141bps. 2-year swap closed at 3.35% with the market now pricing 75bps of OCR hikes in the coming 12 months. This is aligned with our view.

The market is still some way short of pricing our expectation of 200bps of rate hikes in the coming two years.

Still, for now we think some receiving interest may begin to return to the market, given how quickly market pricing has moved and that 2-year swaps now offers 7bps of roll and carry per month.

That said, continued paying interest is seen in the ‘real’ economy, from the mortgage book and small to medium-sized businesses.

NZ bonds also sold-off across the curve yesterday, with the yield on NZGB23s closing up 12bps. Direction of yields will still be heavily influenced by moved in US Treasuries.

However, we think with outright yields on NZGB23s now above 4.40% they should begin to appear attractive on a yield basis or relative to AU (51bps) and US (176bps) equivalents. In addition, they are at fairly attractive levels (-33bps) relative to swap.

Overnight, in the backdrop of fairly light data flow, and rising equity markets, US bonds managed to rally back from start of week lows. US 10-year bond yields declined from 2.75% to 2.65%. This will likely lend some flattening pressure to the NZ curve on the open today.

The domestic highlight today will be the Quarterly Survey of Business Opinion. This will likely tell a now familiar story of broad-based strength. It will offer nothing to challenge current market pricing for the OCR.

Across the Tasman the NAB business confidence survey will be released.