Swap and bond yields tumble on weak GDP number; rate cut in July now almost a lay down misere; steepening in NZ curve expected

By Kymberly Martin

NZ swaps and bond yields closed down 6-13bps yesterday.

Overnight, US 10-year yields traded up from 2.26%, to sit at 2.35% currently.

The NZ curve came under pressure from both ends yesterday.

Long-end yields were under downward pressure given the post-FOMC slump in US long yields. The short-end was then side-swiped by the disappointing NZ Q1 GDP reading.

This leaves us with little doubt the RBNZ will cut again at its July meeting, a position we moved to last week in the wake of the Bank’s June meeting cut.

NZ 2-year swap closed down 9bps at 3.08% yesterday. The market now prices around a 75% chance of a cut at the July meeting. The market almost fully prices two more cuts within the year ahead.

This would see the cash rate fall to 2.75%, not far above where it sat before last year’s tightening cycle. The NZ 2-10s curve flattened a little further, to 79bps. We still see the longer-term trend toward further steepening.

A 75-115bps range through to year-end seems likely to us. The overnight rise in US yields will likely exert some steepening pressure on the curve today.

Overnight, US 10-year yields drifted higher. The move was briefly curtailed by US core CPI data that came in lower than expected, at 1.7%y/y for May.

However, a positive surprise from the Philadelphia Fed business survey ensured the rise in yields regained momentum.

10-year yields briefly touched 2.38% in the early hours of this morning before trading to 2.35% currently.

While a 2.25-2.50% range looks likely to contain yields in the near-term, we ultimately see a break higher to 2.75% by year-end, as the Fed takes its first rate hikes.

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Kymberly Martin is on the BNZ Research team. All its research is available here.