US and German bond spreads at widest point since 1989; NZ swap market relatively unaffected by RBNZ fighting talk

By Kymberly Martin

NZ swaps closed down 1-2bps  yesterday. Overnight, in the backdrop of negative equity markets, US 10-year yields declined from 2.57% to 2.50%.

In an otherwise bare day on the domestic data agenda an unscheduled statement from RBNZ Governor Wheeler was the main event.

However, the fighting talk directed at the NZD had limited impact on rates markets. Clearly the speech was aimed at engendering a lower currency rather than tweaking its OCR views. However, the RBNZ did restate that despite its current pause, it expected that “some further policy tightening will be needed”.

It is also worth keeping in mind the implications of a lower NZD that the RBNZ is so keen to see. The NZ TWI has declined 1.5% since yesterday’s statement. At 77.0, it is now below the Bank’s projected 1Q 2015 average.

Further falls below its projections would suggest upward pressure on the RBNZ’s 90-day bank bill forecasts. At the very least, it should keep the Bank firmly on track for further OCR rises, all else equal. Currently the RBNZ’s rate track implies a peak OCR of around 4.75% by early 2017. This is under- priced by the likes of 2-year swap.

That said, we still see fairly range-bound short-end yields near-term. NZ 2 and 5-year swap closed at 4.04% and 4.37% respectively, yesterday.

Overnight, US Treasuries rallied as equities fell and the USD rose. An auction of seven year notes attracted above-average bidding from offshore investors.

With the spreads between US and German 10-year yields now at their highest level since 1989 it is likely helping offshore demand for USTs. US 10-year yields drifted lower overnight to sit at 2.51% this morning. We continue to see a broad 2.45-2.85% range to year-end, before yields push higher next year.