Only rises in US yields can prevent rate inversion if OCR hikes resume next year; 2-10 spread at lowest since 2008

By Kymberly Martin

NZ curves flattened further yesterday.

US yields declined along with the USD overnight. US 10-year yields sit at 2.37% at present.

NZ 2-year swap closed 1 bps higher while 10-year closed down 3 bps.

As a consequence the curve flattened to new cyclical lows of 53 bps. It was last at this level in November 2008.

Strategically, we expect further flattening to a trough of around 40 bps early next year. Our forecast assumes an eventual push higher in US yields which will exert upward pressure on the NZ long-end. This should prevent the NZ curve from inverting as OCR hikes raise short-end yields.

For now, NZ 2 and 5-year swap sit at 4.04% and 4.57% respectively.

We continue to believe it will be difficult for 2-year to break much below 4.0% unless the RBNZ entirely abandons its tightening bias at its 11 September meetings. We see this as highly unlikely.

Longer NZ bond yields also closed down 3 bps yesterday. The yield on NZGB23s now sits at 4.13%., close to its mid-August lows (4.10%).

Overnight, there was a dearth of major data releases but fighting in Ukraine appeared to continue unabated despite talks between Russian and Ukraine presidents.

While equities were almost completely flat on both sides of the Atlantic, a bid tone remained for US Treasuries. US 10-year yields drifted down from 2.39% to 2.37%. Meanwhile German equivalents sunk to new all-time lows of 0.91%.

The next domestic data focus will be tomorrows ANZ business confidence survey. For today, it is a busier agenda offshore.