By Kymberly Martin
NZ swaps closed up 2-3bps on Friday.
Despite strong US payrolls data, US 10-year yields closed down at 2.58%.
There was slightly better paying interest at the short-end of the NZ curve on Friday, with 2-year swap closing up 3bps, at 4.01%.
The 2-10s curve flattened a little further to 91bps.
We continue to see good value in hedging interest rate risk at the short-end of the swap curve. This is based on our view the OCR will be at 5% by the end of 2015. i.e. a further 200bps of hikes. The market prices only 130bps of OCR hikes by this time.
But the biggest news on Friday night was the much anticipated US labour market data. Payrolls came in at 288k (218k expected) and the US unemployment rate fell to 6.3% (although partly due to a lower participation rate).
The initial response in US Treasuries was to be expected. 2-year yields gapped from 0.41% to 0.47% and 10-year from 2.62% toward 2.70%.
However, this proved short-lived. News of the deteriorating situation in the Ukraine soon saw the bid-tone return to ‘safe haven’ US Treasuries. US 10-year yields ended the week at 2.58%, the lows of their range, last seen in early February.
This suggests NZ longer yields may open down at the start of the week, mimicking moves in Aussie bond futures on Friday night.
Domestically, there is little on the data front at the start of the week. This week’s local highlights for fixed interest markets will be Wednesday’s NZ labour market reports, Thursday’s AU equivalent and tomorrow’s RBA meeting.
On Wednesday, we anticipate a solid Q1 NZ employment gain that would be just sufficient for the unemployment rate to decline to 5.9% (from 6.0%).
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