The return of NZ markets to normal trade should see a modest steepening of rates, helped by rises in US benchmarks

By Kymberly Martin

NZ yields pushed higher across the curve yesterday, following the rebound offshore.

Overnight, US 10-year yields rose from 1.97% to 2.01%.

There was a relatively parallel shift higher in the NZ curve yesterday. NZ 2-year swap closed up 4 bps at 3.83%, while 10-year closed up 5 bps, at 4.01%.

As NZ markets return to full force from holiday mode, in coming weeks, we expect increased interest to extend hedging out the curve, given its current flatness.

This should create some modest steepening pressure, though any move will only extend if accompanied by a rise in offshore yields.

In this regard, US 10-year yields pushed a little higher in the backdrop of more buoyant risk appetite overnight.

The release of the US FOMC Dec Minutes created little response from markets yesterday morning. US 10-year yields pushed up from 1.97% to trade above 2.01% currently.

German equivalents rose from 0.47% to 0.51%. Meanwhile Greek bond yields have fallen back from recent highs. From 10.7%, 10-year yields now trade at 10.1%.

Tonight, with slightly less than the usual fanfare, US Dec payrolls will be released. Consensus looks for 240K, down from 321K previously.

A stronger-than-expected result could see the rebound in yields extend. However, risk lies with positioning, as data shows the speculative community is already heavily short US 10-year Treasuries. In fact short positions at the turn of the year were at their most extended since May 2010.