US jobs report affects US and NZ bonds with yields falling; swaps fall too with help from Kauri issuance

By Kymberly Martin

NZ swaps closed down 1-3bps on Friday. US 10-year yields closed the week at 2.86% after the weaker-than-expected US payrolls report.

The middle of the NZ curve is seeing receiving interest as the result of Kauri issuance flow. More may be in the pipeline which should keep flattening pressure on the mid-curve.

NZ 2 and 5-year swap closed at 3.81% and 4.65% respectively, around 10 bps down from their highs earlier this month. Still 2-year remains close to ‘fair value’ based on our expected OCR trajectory.

We see a first OCR hike in March and 125 bps of hikes by year end.

There were some diverging views seen in the NZ bond curve. Shorter-end yields closed virtually unchanged, while longer-end closed down 3 bps.The yield on NZ 10-year bonds now sits at 4.70%, well within the 4.50-5.10% range we see for the year ahead. Longer-dated yields will likely open lower today after the moves offshore on Friday night.

The market’s response to Friday night’s US payrolls data was immediate. US benchmark 10-year yields gapped from 2.96% to 2.90% before closing down further at 2.86%. AU bond futures similarly gapped on the news.

Other components of the labour report showed the US unemployment rate dropping to a five-year low of 6.7%. This is within a whisker of the 6.5% rate, the Fed had previously established as a ‘trigger’ for reconsidering its cash target rate. However, in its December Minutes it emphasised it would keep rates low well after this target was met. It highlights the difficulties of setting numeric targets in advance.

Still the Fed is likely still on track to gradually ‘taper’ its asset purchases this year.

On Friday night, Stanley Fischer was formally nominated as Janet Yellen’s Vice-Chair at the US Federal Reserve.