As the RBNZ hikes rates next year the swap curve should flatten further with most of the action being in the short end

By Kymberly Martin

NZ yields closed down a further 2-4bps yesterday. Overnight, US 10-year yields consolidated further around the 2.50% level.

NZ swaps continued to dribble lower with 2 and 5-year swap closing at 3.46% and 4.33% respectively. The market now prices less than a 70% chance of an RBNZ rate hike in March, and less than 90bps of rate hikes in the year ahead. We continue to expect the RBNZ to begin its process of OCR ‘normalisation’ with a rate hike in March next year.

The 2-10s swap curve that peaked above 160bps in early September is levelling off above 140bps, for now. Ultimately as we move through next year and OCR hikes get underway, we expect the 2-10s curve to flatten toward 60bps. i.e. short-end rates will move up faster than long-end.

Yesterday afternoon’s DMO bond auction attracted much stronger demand than recent events, as anticipated.

The bid-to-cover ratio for the $200m of NZGB2020s on offer was a hefty 6.5x. The successful range of bids was fairly tight at less than 2bps. The weighted average successful yield was 4.36%, with the bonds rallying after the event to close at a yield of 4.33%.

Overnight, in the backdrop of modestly buoyant equity markets, US benchmark 10-year bond yields consolidated around the 2.50% level. Resistance for bonds was once again encountered when yields dipped toward 2.47%. Similarly German 10-year bonds consolidated around the 1.77% level.

Today, there is little on the domestic agenda to impact on yields so expect some consolidation into week end.

Tonight, there is a decent array of offshore data scheduled. The German IFO survey of business and UK 3Q GDP will be the highlights in Europe. Durable goods orders and the final reading of the University of Michigan consumer confidence survey (October) will round off the week in the US.