By Kymberly Martin
NZ yields closed up across the swap and bond curve yesterday following the previous days’ offshore moves. Swaps closed up 2-8bps across the curve. The 2-10s curve steepened back toward its highs for the year, at 139bps.
NZ 2-year swap is close to ‘fair value’ based on our OCR forecasts. ‘Carry’ on receiving NZ 2-year swap is now very compelling at 7.4bps/mth. In addition, the RBNZ will imminently announce the details of its latest macro-prudential tool i.e. Loan to Value Ratio (LVR) restrictions for the banking sector.
Their implementation could cause the market to question the extent to which the RBNZ will need to use its core monetary policy tool (OCR), in order to cool the over-heating property market.
However, swap markets are experiencing persistent pay-side flow via the mortgage sector’s desire to ‘fix’ rates. This may remain until the mortgage curve re-prices (steepens) to make this unattractive to the retail market.
NZ bonds closed up 6-10bps yesterday, with yields pushing through the top of year-to-date ranges. Today’s DMO tender of $300m of NZGB 2020 bonds will be crucial for gauging current demand for NZGBs.
Outright yields on NZGBs (10-year at 4.46%) are becoming increasingly attractive. However, in a broader ‘bear’ market we do not see investors leaping back into longer-dated NZGBs.
Yesterday’s update of foreign ownership of NZGBs confirmed that holdings peaked at 69% in May. July’s reading sat at 67.9%.
In fairly calm markets overnight, US 10-year yields traded a tight sideways range between 2.69% and 2.73%. For now, the top of the range for yields of the past two months appears to be holding. Tonight, there is an array of US data to potentially impact on US yields, in a market that is increasingly in ‘data-watching’ rather than ‘Fed-watching’ mode. The top of the range for US 10-year yields may again be tested.
Today, the domestic highlight will be the release of the July PMI. We would not be surprised to see further broad strength after the June reading of 54.7.
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