By Kymberly Martin
NZ yields closed down and the curve was flatter yesterday.
AU short-end yields touched new lows. Early this morning US 10-year yields rebounded from intra-night lows.
There was flattening pressure on the NZ curve from the outset given the previous night’s continued subsidence of US yields.
NZ short-end yields showed little response to Fonterra’s announcement that reiterated its previous price guidance for the 2014/2015 season. However, NZ short-end swaps followed the lead of AU equivalents that have touched new lows.
AU 2-year swap has slipped to 2.0%. The market now prices a further 58 bps of rate cuts from the RBA.
This sentiment will continue to impact on expectations for RBNZ activity. The market now fully prices an RBNZ cut by a year’s time. NZ 2-year swap closed yesterday at 3.53% and 10-year at 3.66%.
As the 2-10s curve once again approaches 10 bps, we expect to see corporate hedging enticed out the curve.
We see good hedging opportunities around this level as we anticipate the 2-10s curve will trade up to 50 bps in H2 as NZ long-end swaps follow US long yields higher.
Overnight, US 10-year yields touched their intra-night lows, of 1.85%, around the time of disappointing US durable goods orders.
Then, in the now familiar to-ing and fro-ing of Fed-speak, Fed member Evans was quoted as saying “It’s still a good idea that we’re in no hurry”.
Meanwhile Lockhart said he expects to vote for higher rates by September.
Finally, Bullard suggested that, with the market’s expectations for the future path of the Fed funds rate still some way below the Feds own projections, the market runs the risk of being surprised.
These latter remarks may have assisted in the rebound in US 10-year yields this morning. They now trade at 1.92%. This will likely stem the flattening of the NZ curve for today.