Positive data out of the US and Germany sees key bond yields rise; nothing on the cards to derail NZ yields from following suit

By Kymberly Martin

NZ swaps closed up 2-3bps across the curve yesterday. Overnight, US 10-year yields pushed up toward the top of the recent range to sit around 2.72% this morning.

The NZ market continues to price a 25bps rate hike from the RBNZ by March next year. It also prices around 165bps of rate hikes in the coming 2-years.

We see a first hike in March next year and 200bps of rate hikes by mid-2015. On this basis we still see modest ‘value’ in hedging interest rate risk over a 2 to 4-year time frame. However, 5-year rates have pushed up to relative ‘expensive’ territory in recent months, offering little hedging ‘value’, in our view.

Yesterday, the RBNZ released its response to submissions on high-Loan to Value Ratio restrictions. No firm policy has yet been announced.

The market may take such announcements as reason to limit increased expectation of OCR hikes. i.e. rightly or wrongly, the market may see the implementation of these macro-prudential tools as reducing the need for the RBNZ to use its core monetary policy tool, the OCR.

Overnight, the push toward higher yields on US and German bonds started with the release of the better than expected German ZEW survey. German 10-year yields closed up 10bps, at 1.81%. US 10-year yields pushed up to 2.72%, close to the top of their range of the past two months.

The moves were mimicked by Aussie futures overnight. This suggests a notable rise in NZ yields today is likely, especially at the long-end of the curve.

Domestically, today we have retail sales. We anticipate a 1.7% volume rise in the quarter (consensus 1.5%), so nothing likely to derail a push higher in yields today.