By Kymberly Martin
Swaps closed up 4-10bps across the curve with a steepening bias yesterday. Overnight, US 10-year yields consolidated around 2.91%.
NZ 2-year swap closed up 4bps in thin trading conditions. It sits at 3.48%, not far below the levels it peaked prior to the RBNZ’s LVR announcement.
The 2-10s curve steepened sharply to 159bps, its highest level since October 2011. The moves were initiated by the post FOMC rise in offshore yields.
However, it is a little surprising to see the lack of receiving interest at these levels, remembering the ‘carry’ on NZ 2-year swap now sits at a hefty 8bps/month.
We suspect there may still be an overhang of mortgage paying, but anticipate this may reduce in coming weeks.
Recent increases in domestic mortgage rates may well curtail the volume of fixed rate paying hitting the market.
NZ bond yields also rose 5-10bps, with a steepening of the curve. The yield on 10-year bonds now sits at 4.71%.
If we can start to see some stabilisation of US Treasuries, we would not be surprised to see buying interest returning to NZGBs at these levels. This could be outright, or relative to US equivalents (NZ-US 10-year spreads are at 180bps), or relative to swap (NZ 10-year swap-bond spreads are close to bottom of ranges, at 36bps).
Overnight, ‘risky’ asset (equities, credit) were slightly more buoyant, in the backdrop of stabilising ‘benchmark’ bond yields.
German and US 10-year bond yields consolidated around 1.92% and 2.91% respectively. Peripheral European spreads to German bonds also narrowed. For example, Italian-German 10-year spreads narrowed 10bps to 239bps.
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