By Kymberly Martin
It was a fairly quiet end to the week in NZ rates with yields flat to down 2bps. US 10-year benchmark yields closed the week at 2.62%.
Following the recent dip in NZ swap yields we continue to see paying interest across the curve from the local ‘real economy (corporate/business borrowers). However, these flows are being easily absorbed by offshore receiving interest for now.
We see modest ‘value’ in paying short-end swaps relative to the OCR track we see ahead. Our central view is for a first 25bps hike in June next year. Thereafter we see a steady ‘normalisation’ of the OCR to a peak of 4.50% in 2H 2015.
In coming weeks, some expected softness in NZ housing data may entice offshore receivers to push yields even lower on the assumption that LVR restrictions are ‘biting’ and therefore less OCR tightening will be required.
Any such pullback would make good hedging opportunity in our view. We continue to see short to mid-curve swaps being higher in the year ahead. We forecast 2 and 5-year swap at 4.60% and 4.90% respectively at the end of next year.
On Friday night, US benchmark yields were on an upward path, assisted by the release of the US ISM survey. 10-year bond yields closed the week at 2.62%, their highest level since mid-October.
This week there is a vast array of Fed speakers scheduled during the week with potential to impact on the Fed tapering/tightening debate and hence US yields.
However, the market now seems more inclined to shun Fed rhetoric in favour of hard data. In this light, Thursday’s US Q3 GDP data release will be important (consensus 2.0%q/q). Friday’s US payrolls data for October will also be closely watched.
The key NZ focus this week will be the employment report on Wednesday. Today, the domestic focus will be on ANZ commodity export prices. But expect yields to open up, following the moves seen in the US on Friday night, mimicked by AU futures. Upward pressure should be felt more at the long-end of the NZ curve.
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