By Kymberly Martin
NZ yields closed down 3-5 bps on Friday. On Friday night US 10-year bonds yields dipped as low as 2.54%, but ended the week at 2.58%.
NZ 2-year swap ended the week around 7 bps off its year-to-date highs, at 3.55%.
The market prices around an 85% chance of an OCR by March next year and looks for around 100bps of hikes by this time next year. This is not far from our own view.
The swap curve has flattened notably, in recent days. 5-year swap sits around 15 bps below its year-to-date highs, at 4.45%. The 2-10s swap curve has also flattened to 143 bps from around 156bps a week ago.
Further near-term flattening will likely be dependent on the direction of moves in offshore yields.
However, as we move into next year we expect a much flatter NZ curve (2-10s to 60 bps), as OCR hikes are reflected more in short-end than long-end yields.
Both AU and NZ long-end bond yields have dipped a little in recent days. NZ 10-year bond yields now sit at 4.71%, down from year-to-date highs of 4.83%.
However, antipodean bond yields have been held up fairly well in the face of the almost 50 bps pull-back in US 10-year bond yields since early September.
Temporary resolution of the US fiscal negotiations has not resulted in a knee-jerk sell-off in US bonds on the back of greater risk appetite. Rather, the market now looks for the potential of delayed QE ‘tapering’ to keep US monetary policy looser for longer.
US 10-year yields ended the week at 2.58%. More broadly, we continue to see a 2.50%-3.00% range for US 10-year yields in the year ahead.
The key test of the bottom-side of this range this week would come from a weak US payrolls release.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.