By Kymberly Martin
NZ swaps closed virtually unchanged yesterday. Overnight, US 10-year yields drifted down from 2.61% to 2.58%.
In a quiet start to the week, 2 and 5-year swap showed little movement yesterday, closing at 4.07% and 4.44% respectively. The 2-10s curve remains at 63 bps.
NZ bonds were a little more inclined to follow Friday’s move higher in US yields. The yield on NZGB23s closed up 2 bps at 4.28%. This has seen swap-bonds spreads narrow further and are now at levels that should attract relative buying of NZGBs.
The only potential hurdle this week is the supply of $200m of NZGBs for the market to absorb, from Thursday’s DMO auction. We would not be surprised to see the new NZGB 2027 bond offered at the tender.
Overnight it was also a relatively quiet start to the week offshore. The market appears to be in something of a holding pattern ahead of Thursday morning’s (NZT) US FOMC meeting.
US yields drifted lower. A much stronger than expected September US Empire Manufacturing release was soon followed by a disappointing August industrial production number.
US 10-year yields trade around 2.58% this morning. Price action suggests the market may have got a little ahead of itself, in the extent it anticipates a less dovish tone at this week’s FOMC meeting.
Today, there is nothing scheduled on the domestic agenda but the RBA’s September minutes will be released across the Tasman. The market currently prices around a 15% chance of an RBA cut early next year and 80% chance the cash rate will be 25bps higher at end -2015. This pricing does not appear unreasonable at present. The hurdle for the RBA to cut again will be high.
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