By Kymberly Martin
It was a very quiet day in NZ markets yesterday. Yields closed down 1-2bps across the curve.
Overnight, US 10-year yields traded between 2.66% and 2.69%.
NZ 2 and 5-year swap now sit at 3.85% and 4.57% respectively. 2-year remains slightly below our calculation of ‘fair value’ (4.00%). 5-year is slightly above ‘fair value’ based on our official forecast the OCR will peak at 4.50% in late 2015.
However we see the risks tilted toward a higher, if later peak. This suggests ‘value’ may be found even in 5-year rates. They sit around 20bps below early-year peaks.
Overnight it was very quiet on the offshore data front. US 10-year yields traded as high as 2.69% early this morning before returning to trade at 2.67% currently.
Today there is little scheduled on the domestic agenda but across the Tasman the highlight will be the release of the NAB business survey. The key will be to see it can sustain its improvement in December.
Business conditions then moved to their highest level in 2 ½ years, contributing to the RBA’s recent move from an easing to a neutral stance.
Tonight the highlight offshore will be new Fed Chair, Yellen’s, address to the House. She is widely perceived as more dovish than Bernanke. But the market still anticipates a steady progression of ‘tapering’ at future Fed meetings despite recent labour market disappointments. Any deviation from these expectations could see a sharp response in yields. However, a move sub 2.60% on 10-years will likely be met with headwinds. Similarly we see a move below 5.00% on NZ 10-year swap as difficult to sustain.
Her ‘forward guidance’ will also be of great interest given the US unemployment rate, at 6.6%, is now within a whisker of the Fed’s previous target of 6.5%.
She may move away from the target altogether. She may instead put more emphasis on the Fed’s rate track projections, in order to try and keep longer yields contained. We continue to see a 2.5-3.0% range on 10-year yields in months ahead.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.