Mortgage fixing demand limiting the fall in swap rates; downward pressure coming from offshore

By Kymberly Martin

NZ swaps and bond yields closed down 1-4bps yesterday.

Overnight, US 10-year yields gapped lower, to 2.60%.

NZ yields moved lower yesterday, more or less in sympathy with the moves offshore on Friday night.

Swaps closed down 1-4 bps with a slight flattening of the curve.

However, there still appears to be a reasonable amount of mortgage book and SME hedging interest in the market after last week’s RBNZ statement.

We expect this to continue and to be accentuated once the RBNZ actually announces its first rate hike (in March, in our view).

The resulting paying pressure should limit any pullback in yields. We see 2-year swap at 4.30% by mid-year ahead of 4.60% by year-end (currently 3.85%). This is consistent with our view the OCR will be 200bps higher, at 4.50% by end 2015.

The yield on NZ 10-year bonds closed at 4.53%, close to its lows since late October last year. Further downward pressure will likely be exerted on the long-end of the NZ curve today given moves offshore overnight.

The market reacted abruptly to the disappointing US ISM overnight. US 10-year yields dropped from 2.67% to 2.60% and credit spreads widened.

Domestically today, PM Key is scheduled to speak on NZ and the global economy. ANZ commodity prices will also be released.

Across the Tasman the RBA will meet. It is widely expected to remain on hold, and further soften its easing bias, after recent improvement in AU data (RBA statement on monetary policy to be released on Friday).