Higher US yields sees NZ 2-year swaps close over 3.6% and hit the top of its three month range

By Kymberly Martin

It was a fairly active day in NZ swaps, with yields closing up 5-7bps across the curve. The move was instigated by the push higher in US yields yesterday morning post the release of US FOMC Minutes.

NZ 2-year swap pushed up to close at 3.61%, at the top of its range of the past three months, and the highest point since August 2011. 5-year swap closed at 4.52%. As we approach OCR hikes next year, the path of least resistance for swap yields will be higher.

There is no shortage of potential hedging activity that will result in payside flow, given the majority of NZ borrowers are still ‘floating’.

However, outright ‘value’ in fixed rates compared to floating is now longer compelling based on our central OCR forecasts i.e the market has already priced in most of the 200bps of hikes we see in the coming two years.

NZ-AU 2-year swap spreads have also pushed wider, to 73bps, having dipped to almost 45bps at the start of November. We see spreads widening to around 120bps by mid next year.

Yesterday’s DMO tender of Inflation-indexed bonds was very weak. The bid-to-cover ratio was a soft 1.3x.There was also a wide 18bps range of successful bids. The Q1 bond issuance schedule will be announced around the time of the HYEFU (due on Dec 17).

A tilt toward increased nominal bonds relative to IIBs may be in the offing if relative demand dynamics are seen as a trend. Demand for nominal NZGBs still appears solid.

Overnight, US 10-year yields continued their push higher, to above 2.83%, ahead of the release of the US Philadelphia Fed business survey. The disappointing result (6.5 vs. 15 expected) saw US yields fall back to 2.78% this morning. We continue to see a 2.50-3.00% range containing yields in the year ahead.