By Kymberly Martin
NZ swaps closed flat to down 2bps yesterday. Overnight US 10-year yields slumped to 2.60%.
NZ 2-year swap closed down 2bps at 2.98% while the 2-10s swap curve steepened slightly to 92bps.
We think the market now notably under-estimates the extent of OCR hikes in the coming two years.
We see a further 200bps of hikes over this period. The market prices less than 150bps.
It is true the high NZ TWI may cause the RBNZ to question the pace of near-term rate hikes. However, it is also the case that domestic banks, in many cases, are not passing through OCR hikes to customers. i.e. many mortgage rates have actually declined in recent weeks.
This in turn may require the RBNZ to be more assertive in its rate hiking process.
It was a quiet day in NZ bonds but yields followed their offshore counterparts lower.
The yield on NZGB23s closed down 2bps, at 4.38%, its lowest level since 13 August last year.
Last night’s US data delivery was not far from expectation. The April Manufacturing ISM came in at 54.9 (54.3 expected).
However, the prices paid components fell to 56.5 from 59.0 (59.5 expected).This appeared sufficient to knock yields lower.
US 10-year yields declined from 2.65% to 2.60% after the data.
All eyes are now clearly on tonight’s payroll’s data.
Given the move offshore overnight, mimicked by Aussie futures we anticipate that NZ yields will open down this morning, particularly at the long-end.
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3 Comments
So what if mortgage rates have actually declined ?
In a free market , prices do come down , and the price of money is no different .
The banks are clearly happy with their current margin spread , are not short of funding, are well capitalised , dont need the overnight cash rate facility, and see no need to pass on the increases.
This is the way a market works , in a time of excess supply of money , the price is kept in check until demand increases , no matter what the RBNZ wants
The market , in my view, is more likely to be right about the forthcoming increases .
There is so much cheap money about offshore , and there is so much pressue on the currency that the RBNZ seems somewhat hamstrung right now.
What mortgage rates have actually declined recently? All the news has been up after the OCR rise.
I can only think of one-off cases where say a bank has replaced a 12 month special with an 18 month special. You could argue the 18 month rate has dropped, but it's matched by a rise in the 12 month rate.
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