NZ swap and bond yields fall sharply. Curve flattens creating corporate paying opportunity. More of same expected today

By Kymberly Martin

NZ swap and bond yields fell sharply in the wake of the US FOMC meeting.

Overnight, US yields headed higher, reversing some of their previous day’s moves.

The brunt of yesterday’s moves was felt at the long-end of the NZ curve.

NZ 10-year swap closed down 8 bps at 3.71%. By contrast, 2-year swap closed down only 2 bps at 3.53%. The flattening of the NZ 2-10s curve to 18 bps will start to attract corporate paying interest in our view, especially from those who missed the opportunity to extend hedging when the 2-10s curve fell below 10 bps in late-Jan.

We would view this as a useful strategy given we see the 2-10s curve re-steepening to above 50 bps in 2H.

There was also a strong rally in NZGBs. The yield on NZGB23s fell 10 bps, to 3.30%. Swap-bond spreads have widened as a result.

We continue to see the probability of further widening heading into the maturity of the NZGB 15 April 2015 bond. This should see demand for longer-dated NZGBs remain strong against the backdrop of limited supply.

Overnight, US yields clambered their way off yesterday’s lows. US 10-year yields rose from early afternoon lows of 1.90% to trade around 1.98% currently. Similarly, 2-year bonds pushed up from 0.54% to 0.62% as Dec, Fed fund futures have inched up to 0.47%. We continue to see a first Fed hike in June with risks tilted toward a slightly later start.

Today, the local focus for rates may be a scheduled speech by RAB Governor Stevens. Currently the market prices 53 bps of further rate cuts from the RBA for the year ahead.

Recent market moves show that if these expectations shift significantly some contagion will be felt on expectations for future RBNZ activity. Currently the market more than fully prices a 25 bps cut from the RBNZ by year-end.