Good offshore demand offsetting mortgage pressures in swap market, keeping rate changes limited

By Kymberley Martin

NZ 2-year swap closed down 1bps while longer-dated swaps closed up 5bps.

Overnight, US 10-year yields bobbed around 2.68%.

It was a bit of a volatile day in the NZ swaps yesterday.

Initially 2-year pushed as high as 4.09%, as mortgage paying continues to flow through, post last week’s OCR announcement.

Despite this, good offshore receiving has emerged in the 1y1y and 2-year swap to offset the pay-side flow from the ‘real economy’.

Accordingly, 2-year swap closed down 1bp on the day, at 4.05%. We continue to see 2-year ‘fair value’ around 2.35%, based on our expectations for the OCR to peak at 5.00% at the end of 2015.

The longer-end of the curve pushed higher on the back of some local paying interest and stabilising global risk sentiment following the Crimean vote. NZ 10-year swap closed up 4bps at 4.07%.

NZ longer-dated bond yields also pushed higher, by7 bps, on the day.  The yield on NZ 10-year bonds now sits at 4.58%.

Overnight, in the backdrop of a rebound in equity markets, US bond yields were more range-bound. The yield on US 10-year bonds bobbed around between 2.66% and 2.70%. US core CPI for February (1.6% y/y) confirmed that inflation is not yet an impediment to the Fed maintaining highly accommodative policy.

However, we expect the Fed will announce a further $10b reduction in its monthly asset purchases at its meeting tonight.

We also suspect its commentary may move away entirely from its US unemployment ‘target’ (6.5%). This may be inevitable given the current rate is 6.7% and the Fed has no intention of raising interest rates before late next year.