The market under-estimates the extent of rate hikes ahead with the OCR at 5% in 2015 possible, says BNZ

By Kymberly Martin

As global risk appetite improved yesterday NZ swaps rebounded, to close up 4-7bps. Overnight, US 10-year yields traded between 2.86%-2.72%.

The global relief rally yesterday saw NZ swap yields push higher across the curve. NZ 10-year swaps rose by 7bps, to 5.00%, while 2-year rose 4bps to close at 3.86%.

We continue to see probably the best hedging value in the 3-4-year part of the curve.

Here the market likely under-estimates the extent of rate hikes ahead. We see the OCR peaking, at 4.50%, at least in late 2015, with significant risk the cyclical peak ends up being above 5.0%.

Moves in NZ bond yields were less dramatic. Yields closed up just 2bps across the curve. The yield on NZ 10-year bonds now sits at 4.54%. This remains in the lower-end of the 4.50%-5.10% range we believe will prevail this year.

Overnight, as a state of relative nervous calm prevailed in the Ukrainian, market attention returned to data delivery.

Here, US data releases were on the soft side of expectation (ADP employment 139k vs. 155k expected), (ISM non-manufacturing 51.6 vs. 53.5). This saw US 10-year yields fall from close to 2.72% to below 2.68%, the level at which they had started the evening.

Last night, the Bank of Canada was the latest Central Bank to meet, and kept its cash rate at 1%, as expected, and a neutral policy stance.

Next up tonight will be the Bank of England and ECB. The BoE’s meeting should be relatively boring, with no change to either its interest rate settings or its asset purchase target.

The ECB has potential to be more interesting. It is unlikely to cut its interest rate which already sits at 0.25%. But the market will be looking for signs that the Bank may use other policy measures to support the still tentative recovery in the region.

Today, there are no data releases to note domestically. Across the Tasman, attention will be on AU retail sales.