Despite the push higher in NZ bond yields, spreads to offshore counterparts have not widened

By Kymberly Martin

Yesterday, NZ swaps reversed all of Friday’s ‘post-quake’ fall, to close up 7-9bps across the curve. NZ bond yields also rose by a similar magnitude.

NZ swaps are back at, or close to their highs for the year. NZ 2-year swap closed at 3.52% and the 10-year at 5.01%. The 2-10s curve remains fairly steep at 148bps.

The market is now close to pricing our own long-held view of 100bps of OCR hikes in the year ahead, with 200bps of hikes in the coming two years.

Near-term market pricing is actually starting to look a bit stretched. The market is pricing almost a 70% chance of a first 25bps hike by January (we see a first hike in March).

The RBNZ maintains a seeming reluctance to its tightening bias. The RBNZ’s last published rate track implied a first hike not until 3Q next year (though this forecast will be revisited in its September MPC).

Despite the push higher in NZ bond yields, spreads to offshore counterparts have not widened. Recent NZ moves have simply been keeping pace with the global bond sell-off.

The sell-off in US bonds continued overnight in thin volume and an absence of data. After trading between 2.84% and 2.87% for much of the night, 10-year yields pushed up to sit around 2.89% currently. This is their highest level since July 2011.

Today, the RBNZ’s survey of 2-year-ahead inflation expectations will be released. These will be of interest, although are unlikely to be market moving. Surveyed expectations have been trending down since mid-2011, and at 2.1% now sit close to the RBNZ’s central target.