By Kimberly Martin
On Friday, NZ swaps closed up 5-7bps across the curve. NZ bond yields closed up 4bps. US 10-year yields gapped higher, to close the week at 2.79%.
Markets have rapidly reduced the risk premium that had been built into the NZ curve to address the uncertainty surrounding the situation in Ukraine.
This, in conjunction with a lack of NZD bond issuance in the past week, and the disappearance of offshore receivers has seen NZ swaps rise aggressively. A flurry of pay-side flow from both mortgage books and corporates, ahead of this week’s RBNZ meeting appears to be the key driver.
This move was exacerbated by the rise in AU rates markets on Friday on the back of fairly hawkish comments by RBA Governor Stevens in his scheduled speech.
On Friday night, US payrolls delivered a 175k result (149k expected). The fact employment rebounded in February despite the harsh weather pretty much guarantees the Fed will continue with its steady process of tapering by US$10b at its next meeting. On delivery of the data, US 10-year bond yields gapped from 2.72% to almost 2.82% before settling around 2.79% at the end of the night.
Over the weekend China reported soft export numbers for February.This may dampen general risk appetite at the start of the week. Still, the combination of Friday’s payrolls and the imminence of the RBNZ’s first rate hike this week should see NZ yields push higher. It seems probably that NZ 2-year swap will push through 4.0% this week (currently 3.95%) for the first time since November 2010.
This week will be all about Thursday’s RBNZ meeting. The market is close to fully pricing a 25bps hike at the meeting. More important will be the Bank’s published 90-day bank bill track in the full MPS. Once the rate hiking cycle is underway, debate around the OCR will rapidly switch to what is the likely peak for the cash rate. We now see a 5.0% peak at the end of next year, as the RBNZ is forced to move above ‘neutral’ in order to contain inflation.
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