The rally at the long-end of the NZ curve will last until longer-dated USTs stabilise or rebound

By Kymberly Martin

NZ yields closed down yesterday, with a notable flattening of the curve.

Overnight, US 10-year yields pushed up slightly to 2.61%.

NZ 2-year swap closed down 3bps, at 3.98%, while 10-year closed down 6bps, at 4.86%. NZ bond yields also closed down 3-5bps across the curve.

These moves were a direct reflection of Friday night’s post US payrolls moves offshore. There was little on the domestic data front to impact on yields.

The yield on NZGB23s, at 4.34%, is at its lowest level since mid-August last year. However, on spread to AU and US equivalents yields remain within recent ranges, at 58bps and 190bps respectively.

We would look to position for NZ-US spread widening, if spreads were to approach 180bps.

Overnight, markets were a little subdued as the UK celebrated May Day holiday.

US 10-year yields were nudged from 2.58% to 2.61% early this morning after the release of the US non-manufacturing ISM (55.2 vs. 54.0 expected).

Speculative short positions in US 10-year Treasuries have been reduced in recent weeks. But with speculative positions still short overall it suggests USTs still have room to rally on future soft data or dovish Fed comments.

In this regard, Fed Chair, Yellen’s, testimony (Thursday morning NZT) will be of particular interest. It is unlikely the rally at the long-end of the NZ curve will cease until longer-dated USTs stabilise/rebound.

Today there is once again little on the domestic data agenda, Across the Tasman, all eyes will be on the RBA’s meeting. However, little deviation from their comfortably ‘neutral’ stance is expected. Meanwhile the market continues to price a first 25bps hike from the RBA by August next year.