Improved ‘value’ for borrowers wishing to hedge their interest rate exposure ahead of the imminent OCR hiking cycle

By Kymberly Martin

NZ swaps closed down 1-3bps across the curve with a continued flattening bias. Overnight, US 10-year yields traded a tight path around 2.70% ahead of Fed Minutes.

NZ 5-year swap closed down 3bps at 4.50%. There were no key domestic economic data releases to drive the move.

Rather, the issuance announcements from Fonterra and IRBD likely drove receiving interest at the mid-curve. 5-year swap is now down more than 25bps from its early January highs.

This provides improved ‘value’ for borrowers wishing to hedge their interest rate exposure ahead of the imminent OCR hiking cycle.

We see this commencing on March 13, and progressing steadily until the OCR is 200bps higher in two years’ time.

Yesterday’s LGFA tender had mixed results. As anticipated, the shorted dated bonds on offer were snapped up at tight prices and high bid-to-cover ratios.

The LGFA21s attracted less aggressive demand with a 6.5bps range of successful bids. The LGFA now has almost $3.2b of debt outstanding.

US yields traded a fairly steady path in anticipation of the release of US Fed Minutes later this morning (8am NZT).

In the UK, Gilt yields gapped lower on the back of disappointing UK employment data, showing the unemployment rate unexpectedly ticking up from 7.1% to 7.2%, and the release of BoE’s February Minutes.

The move by Gilts illustrates that although US yields remain the anchor for long-yields globally, local events are still capable of eliciting strong responses.

After the Fed Minutes are out of the way, locally today will be about the release of the NZ PPI and a scheduled speech by the NZ Finance Minister (12.00 NZT).