Poor US data saw bond yields fall; more local bond issuance planned; more flattening expected

By Kymberly Martin

There was a relatively large rally across the NZ swaps curve yesterday, with a flattening bias.

Overnight US 10-year yields traded lower as US data generally disappointed.

NZ 2-year swap closed at 2.81%, down 4bps.10-year swap closed down 5bps, resulting in a slight flattening of the 2s10s curve to 126bps. There were no domestic data releases to drive the move.

However, there was announcement of several prospective and firm bond offers, including from Fonterra and the IBRD. This may have lent an offer tone, particularly at the mid-curve (5-year).

Heading into the 13 March RBNZ meeting, the market prices around a 94% chance of a 25bps hike. It also prices around 107bps of hikes by year-end. We see the OCR 125bps at year-end following a first hike in March.

Overnight, equities were relatively flat but US Treasuries captured some demand as US data was generally disappointed expectation. Although partly attributable to harsh weather the market responded to a sense of underlying softness in the data. US 10-year yields declined from overnight highs around 2.76% to trade below 2.70% this morning.

This may add further flattening pressure to the NZ curve today.

Domestically, the RBNZ’s latest weekly mortgage approvals data will be released today. These are closely watched by the RBNZ.

However across the broad range of NZ housing data indicators it does not seem that the RBNZ’s recent LVR restrictions are having excessive impact.