Markets give muted approval to RBNZ's settings which removes housing issues from OCR framework and shifts them to FSR for action

By Kymberly Martin

NZ short-end swaps unchanged, while long-end swaps declined.

Overnight, US 10-year yields traded lower in volatile trading.

The RBNZ delivered on expectations yesterday morning.

It maintained a very even-handed assessment of the economy and explicitly stated that it is now neutral.

It lowered its 90-day bank bill track to show an entirely flat trajectory at 3.70% out to the end of its forecast period in March 2017.

In comments, Governor Wheeler stated that although the Bank is very mindful of risks from sharply appreciating house prices, this is strictly from a financial stability perspective. It did not influence the Bank’s monetary policy decision.

Expect further work on alternative tools to address the housing market.

The rates market’s response was very muted. While 2-year swap traded a 2 bps range on the day it closed unchanged. Meanwhile longer-dated swaps declined in the afternoon alongside AU counterparts. 10-year closed down 3 bps at 3.84%.

Yesterday’s AU employment data that came in not far from expectation produced some initial volatility in AU short-end rates, but little enduring impact. The market continues to price around 50 bps of further rate cuts from the RBA by year-end. Our NAB colleague’s central forecast is a next 25 bps cut at the May meeting.

US 10-year yields gapped lower in the early hours of this morning after the release of softer than expected retail sales data. However, from intra-night lows close to 2.04%, US 10-year yields have grappled their way back to 2.08% currently. Meanwhile German equivalents climbed steadily from 0.19% to 0.25% overnight.

This afternoon the NZDMO will auction NZ$300 mln of 2027 bonds. We expect good demand given pending NZGB maturity and coupon payments, and that NZ-AU 27 spreads are currently in the upper-band of recent ranges.