New Zealand 2-10 curve suddenly at its steepest since December 2014 and it may get steeper still

By Kymberly Martin

Curve steepening was the main theme in NZ rates markets yesterday.

Overnight, US 10-year yields pushed up from 2.02% to 2.07%.

Yesterday’s NZ curve steepening resulted from opposing forces at either end of the curve.

Long-end yields were on the ascent from the open, following the previous night’s offshore moves. By contrast, short-end yields quickly fell in response to the RBNZ’s OCR Review.

The Bank’s statement was essentially a compacted version of last week’s RBNZ scheduled speech on inflation. It again clearly signalled the Bank is more inclined to ease than to raise rates, at this point of time.

However, this seemed to catch some in the market unawares. NZ 2-year swap fell, to close down 2 bps, at 3.49%.

We continue to see a 3.40%-3.70% range as likely in coming months. This is based on our assumption the market will remain inclined to price RBNZ rate cuts but the Bank will not actually deliver. The market currently prices around 30 bps of cuts for the year ahead.

By contrast, NZ 10-year swap closed up 6 bps, at 3.86%, taking the NZ 2-10s curve to 37 bps. This is its highest level since mid-December, and also right on the 200-day moving average.

Given a further push higher in US 10-year yields overnight (to 2.07%), we suspect the NZ curve could break higher again today. We continue to see the curve trading above 50 bps in H2. Consequently, we would consider using any near-term dips in long yields to extend hedging out the curve.

The push higher in US yields is being assisted by a continued sharp sell-off in German bonds. From lows below 0.10% a fortnight ago, German 10-year yields now trade at 0.37%.

The night’s moves will be the greatest influence on the NZ market today, in the absence of domestic data releases.

Tonight, the end of week sentiment in rates markets will be set by the release of US Manufacturing PMI data and ‘Fed speak’. Technically the next line of support for US 10-year Treasuries is seen when yields approach 2.16%.