By Kymberly Martin
NZ swaps closed up 3bps across the curve. Overnight, US 10-year yields traded down from 2.37% to 2.34%.
It was a fairly busy day, starting with the RBNZ’s release of its Financial Stability Report. It dispelled speculation the Bank would imminently amend/remove its LVR restrictions (put in place last October). It stated these will remain in place for now, as the Bank is concerned about the risk of resurgence in the over-valued housing market.
But it is the Bank’s intention that the restrictions do not become permanent. While the Bank believes the restrictions have had the equivalent impact of a 50bps rise in the OCR, it does not see their ultimate removal as having a symmetrical impact. However, the Bank reiterated it believes rates will need to rise further in coming years.
Later in the day RBNZ Governor Wheeler was in fact quoted as saying that the ‘neutral’ cash rate remains at 4.50%. Overall the report and comments do not change our central view the Bank is on hold until December next year.
Ultimately we see the OCR at 4.25% by early 2016. Although growth data will remain solid in coming months it will take time for evidence of inflation to accumulate. Consequently, we see 2-year swap in a range below 4.1% until well into next year. It closed yesterday at 3.95%, while the yield on 10-year swap closed at 4.48%.
Overnight, in the backdrop of slightly softer equity markets, US 10-year yields drifted down from 2.37% to below 2.32% before returning to trade above 2.34% currently.
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