US 10-year bond yields spiked higher as non-farm payrolls came in well above analyst expectations

By Kymberly Martin

It was a fairly subdued at the end of week in NZ markets. However, Friday night’s stronger than expected US payrolls saw US 10-year yields gap higher to close at 2.75%.

NZ yields closed little changed on Friday. 2 and 5-year swap closed at 3.50% and 4.39% respectively. The market prices around 30bps of hikes by April next year and 100bps by the end of 2014. Our central view sees a first hike in June next year with 125bps of hikes by the end of the year.

The 2-10s swap curve has inched a little steeper over the past week to sit at 147bps. This steepening will likely extend at the start of the week given the global move higher in yields on Friday night.

The move was led by US benchmark yields, after non-farm payrolls surprised to the upside. Despite a few oddities in the detail, the market responded to the data at face value. US 10-year bond yields gapped immediately from 2.60% to 2.72%, before pushing higher to end the week around 2.75%. The move was mimicked by German bonds and AU bond futures.

It will be fairly quiet data-wise domestically today with only NZ electronic card transactions scheduled.

The domestic highlight this week will come with the release of the RBNZ’s Financial Stability Review on Wednesday. This has come in to central view. It is the vehicle in which the RBNZ can discuss macro-prudential policy in depth and in particular the recently implemented LVR restrictions.

Today, is a public holiday in the US, and light on European data. AU home loan data will be delivered today, likely to reflect evidence of a rising trend in the housing market. The market continues to price around a 20% chance of RBA rate cut by early next year but that the cash rate will be 25bps higher by early 2015.

Expect NZ yields to open up across the curve today given the moves seen on Friday night, with a step higher in long yields in particular.