The bond market focus shifts to Australia as they come to grips with their employment changes; down pressure on long end of NZ curve

By Kymberly Martin

NZ yields closed down 1-2bps across the curve yesterday.

Overnight, US 10-year yields drifted down from 2.48% to 2.44%.

With a limited domestic agenda yesterday the market’s focus was across the Tasman on the AU employment report. This provoked a sharp fall in AU swap rates. 3-year swap fell from 2.93% to 2.82%.

As NZ swaps were much more stable, NZ-AU 2-year swap spreads have rebounded from 132 bps to 142 bps. We continue to see a cyclical peak in this spread around 160 bps, early next year.

Despite the higher unemployment rate, our NAB economists believe we are now approaching a 6.5-6.6% peak. Leading indicators point to solid employment growth ahead, so the RBA would not be too alarmed by yesterday’s outcome.

The Bank may have edged a touch closer to an easing bias, but its continued insistence that rates are low enough to support activity means no rate cut is likely on the back of this data alone.

The market now prices around a 50% chance of a 25 bps cut in the year ahead.

Overnight, both the BoE and ECB left rates unchanged as expected. President Draghi said that real rates will remain negative in the EU for much longer than in the US.

This, combined with generally subdued risk sentiment overnight saw German bunds well bid. 10-year yields dipped to new historic lows of 1.06%. US equivalents followed, falling from 2.48% to 2.44%, now not far from late-May lows (2.40%).

These moves will likely exert downward pressure on the longer-end of the NZ curve today. It is a relatively light local calendar. The NZ Finance Minister is scheduled to talk in Hamilton while the Reserve Bank of Australia is due to release its Monetary Policy Statement.