The NZ curve steepened yesterday as the RBNZ cut its cash rate. Overnight, US 10-year yields traded down from 2.50% to 2.39%.
The RBNZ cut its cash rate 25 bps to 3.25% yesterday morning. This surprised us, in that we had felt the Bank’s own criteria for cutting rates were yet to be met. For full details see our note yesterday; “The Easing Cycle Begins”.
That said, now the Bank has chosen to start an easing cycle, we do not believe yesterday’s cut will be a ‘one off’. We expect a follow up cut at the next meeting in July and see around a 50% chance of a further cut in September.
The market now prices around a 50% chance of a cut at the July meeting. This provides a good near-term receiving opportunity in our view.
The market also prices a cash rate that bottoms around 2.90% within the coming year. This seems a fair balance of risks to us.
We therefore see 2-year swap at current levels (3.24%) as close to ‘fair value’. Its intra-day dip to 3.10% would seem unjustified. Paying toward this level, or receiving above 3.30%, would appear tactically attractive in coming weeks.
The longer-end of the NZ curve continues to take its cue from offshore moves.
NZ 10-year swaps closed little changed yesterday, and the 2-10s curve steepened up to 92 bps. This is its highest level since April last year. Long gone is chatter of inverted yield curves, as the NZ curve has steepened 75 bps in a little over seven weeks. We now see the curve trading broadly between 80-120 bps in the year ahead. Our assumptions are the RBNZ cuts again in July and the US Fed undertakes its first rate hike in Sept.
Overnight, despite a handful of generally better than expected US data releases, US bond yields failed to push higher. After an initial spike higher on solid US retail sales data, US 10-year yields have drifted down from 2.50% to around 2.39%.
After their surge in recent weeks, it appears it will take more than solid data prints to get yields to break higher, to the next level.
Equally, German 10-year bond yields have drifted down overnight, from 1.03% to 0.88%, as the IMF’s negotiations with Greece have stalled. Expect a flatter NZ curve today.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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