BNZ pushes back its expectation of RBNZ rate hikes to September 2015 on a lower CPI track

By Kymberly Martin

Following Friday’s offshore moves, NZ swaps closed up 2-5 bps, yesterday.

Overnight, US 10-year Treasury yields traded between 2.16% and 2.22%.

As 2-year swap closed up 2 bps, at 3.98%, the more notable moves were at the long-end of the curve. The flatness of the curve is attracting corporate interest.

NZ 10-year swap closed up 5 bps, at 4.45%, with the 2-10s curve rebounding to 47 bps. Extending hedges out the curve remains a compelling hedging strategy in our view.

In terms of the OCR outlook, we have pushed back expectations for the resumption of rate hikes from next March to September. This is primarily based on downward revisions to our CPI forecast track.

We still see the OCR 75 bps higher by end-2015, and reaching a cyclical peak, circa 4.50%, in 2016. The market still under-estimates this track, but there are no imminent catalysts to push market expectations higher. In fact, this Thursday’s Q3 CPI release could reduce the market’s OCR expectations near-term.

NZ bonds also sold off. The yield on NZGB23s closed up 4 bps, at 4.04%. NZ-US23 and NZ-AU23 spreads have widened to 202 bps and 87bps respectively. From these levels we see long-dated NZGB outperformance relative to USTs as more likely than against ACGBs.

In the absence of key data releases overnight, German 10-year yields traded sideways around 0.85%. US equivalents have drifted down from 2.22%, to 2.18% currently. Peripheral European spreads to German bonds have pushed a little wider. For example, Spanish-German 10-year spreads now sit around 140bps, from around 116bps earlier this month.

Today, NZ net migration figures will be released. The RBNZ is watching these closely, having been surprised by their continued strength. However, analysis also shows the migration trend is not proving as inflationary as might have historically been expected. The composition of migration suggests the supply side of the economy is also being boosted.