By Kymberly Martin
NZ yields followed their AU counterparts higher on Friday, closing up 2-5bps across bond and swap curves.
Despite the US fiscal shenanigans that have been impacting on global markets, NZ rates markets have traded fairly tight ranges over the past week. 2 and 5-year swap ended the week at 3.45% and 4.37% respectively, at similar levels that they closed the previous week.
It was notable that rates markets did not show a significant response to Governor Wheeler’s warning last week that the OCR could be 200bps higher by 2016.
Swap market pricing was already consistent with around 180bps of rate hikes over the next two years, starting from early next year.
The 2-10s swap curve has been consolidating around the 145bps level. This is in line with US 10-year yields that have been consolidating above 2.60% over the past week.
We continue to believe that while US fiscal turmoil reigns, it is more likely US 10-year yields will test the lower, than upper-end, of the broad 2.50-3.00% range we see for the year ahead.
As AU yields rose more sharply than NZ equivalents on Friday, the NZ-AU 10-year bond spread has narrowed to 67bps. This spread spiked above 80bps in mid-September, which is close to the top of the range that we believe will prevail in the year ahead.
Domestically, today we get the release of the QVNZ housing report. Local highlights this week will be tomorrow’s NZIER Business Opinion Survey and AU’s NAB business confidence survey. With the shutdown underway in the US, the official US data schedule is highly uncertain.
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