By Kymberly Martin
NZ swaps pushed another 7-12bps higher yesterday, albeit in thin conditions. The curve steepened. Overnight, the push towards higher yields continued.
NZ 2-year swap (3.53%) has now almost completely factored in our OCR trajectory i.e. a first 25bps hike in March next year with gradual rises to a 4.50% peak in mid-2015. 5-year swap has now pushed above what we consider to be ‘fair value’ based on our OCR forecasts.
However, there remains reluctance in the investor market to receive swap against the persistent flow from the mortgage book. While the mortgage curve still remains relatively flat this flow could continue, pushing swaps above ‘fair value’ across the curve.
Yesterday’s DMO bond tender was fairly soft. Although the auction attracted solid bidding, with a 2.7x bid-to-cover ratio, overall demand was tepid. There was a wide 10bps range of successful bids. Bond yields closed up 7-13bps across the curve, with a steepening bias.
The theme was continued overnight with the sell-off in US Treasuries. The wide array of US data releases last night were a mixed bag. However, the bond market appeared to be looking for excuses to sell-off. It seized on the better-than-expected US weekly jobless claims (320K vs. 335K expected), the lowest reading since early 2008.
US 10-year bond yields burst through the top of ranges, to as high as 2.82%.Later they pulled back to 2.76% as subsequent data fell below expectation and political tensions in Egypt were seen rising.
German 10-year yields sit 8bps higher this morning at 1.88%, their highest level since March last year. The moves have been mimicked overnight by Aussie bond futures. Expect some further push higher in NZ yields today, with a steepening bias.
There are no domestic data today.
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