A downbeat ECB and increasing geopolitical risk sees NZ swap rates decline sharply across the curve

By Kymberly Martin

On Friday, NZ yields followed the previous night’s decline in offshore yields.

Swap and bond yields closed down 3-11 bps.

NZ swaps declined across the curve on Friday following moves offshore that were inspired both by a downbeat ECB and increasing geopolitical risk. In particular, the market focused on the headline that US President Obama had authorised air strikes on Iraq.

NZ 10-year swap closed down 7 bps at 4.66%., its lowest level since May last year.

Domestic paying interest at the short-end helped limit the decline in short-end swaps. Still 2-year closed down 4bps at 4.04%. We continue to see attractive hedging value below 4.00%, given we see ‘fair value’ above 4.40%. This is based on our assumption of a 5.0% OCR by 2016.

NZ bonds also experience a strong rally.

The yield on NZGB19s declined 7 bps, to 3.82%, while that on NZGB23s fell 11 bps, to 4.16%. This is just shy of the lows on yield reached in late-July.

Market sentiment improved on Friday night, assisted by headlines that Russia looks to de-escalate crisis in Ukraine.

While US equities rebounded, US 10-year yields pushed off intra-night lows (2.35%) to end the week back at 2.42%.

Still, the intra-night lows were a new low on yield since June last year. Until global geopolitical risks ease it is difficult to see a firm rebound, irrespective of US data delivery.

This week is fairly low key on the US data front, with nothing scheduled this evening. Domestically, today, there are only NZ electronic card transaction data due.