Market pricing in 80bps of OCR hikes in the year ahead amd 150bps of hikes in the coming two years

By Kymberly Martin

NZ swap and bond yields closed little changed yesterday. Overnight US 10-year yields consolidated below 2.60%.

As NZ swap yields hover near their highs for the year, the market prices around 80bps of OCR hikes in the year ahead.

Market pricing is also consistent with around 150bps of hikes in the coming two years.

We see 200bps of hikes over this period. However, until rate hikes actually get underway the market will likely remain reluctant to fully price our view of an OCR at a cyclical peak of 4.50% by mid-2015. In the near-term the carry and roll on 2-year swap appears increasingly compelling (7bps/month).

The NZ 5-10s swap curve is approaching four-year lows. Strong interest from the ‘real economy’ to pay 5-year swap has pushed the middle of the curve higher relative to the ends.

For many SME borrowers 5-year is the maximum point on the curve they can ‘fix’ to hedge against future rate rises. This point on the curve has therefore become relatively expensive compared to 2 to 4-year rates, in our view. We would not be surprised to see paying interest, shifting to other parts of the curve given the relative expensiveness of 5-year swap.  We expect to see some steepening of the 5-10s curve.

Across the Tasman there was limited response in rates markets to yesterday’s labour market report. The market continues to price around 30bps of further rate cuts from the RBA by Q1 next year.

Overnight, in an absence of key data releases equities provided positive returns while US 10-year yields traded a fairly tight 3bps range, to sit around 2.59% currently.

Domestically, card spending data will be released today but is unlikely to impact on rates markets.