Bond and swap yields hit by poor dairy auction and low-side CPI reading; scene set for RBNZ to slash OCR to 2.5%

By Kymberly Martin

NZ swaps closed down 11bps across the curve yesterday while NZGB yields closed down 14bps.

Currently US 10-year yields sit toward the lower-end of their 2.34% to 2.40% overnight range.

Yesterday, NZ rates were hit by the double -whammy of a poor GDT dairy auction on Wed night, and a low-side reading for Q2 CPI.

At 0.3%y/y, annual CPI inflation is only limping off the lows of 0.1% seen in Q1.

In a full note yesterday we outlined our view that the RBNZ will likely cut the OCR more forcefully. We now see the OCR cut back to last year’s trough of 2.50%, by the October meeting.

This is a little more aggressive than current market pricing. It prices a trough in the OCR around 2.56% by Q1 next year.

NZ 2-year swap closed down 11bps, at 2.89%, near its lowest level since May 2013.

10-year swap has fallen to 3.78%, maintaining the 2-10s swap curve at 89bps.

The change to our OCR forecasts adds conviction to three of our key rates views: First, NZ short-end yields should trade lower near-term; we now look for 2-year swap to trade down to 2.70%.

Second, we expect a steeper 2-10s swap curve and now see a 75-125bps range through to year-end.

Third, we expect NZ 10-year bonds to outperform US equivalents; we target NZ-US 10-year bond compression to 70bps from current levels around 95bps.

Overnight, US 10-year yields initially tracked higher with their German counterparts. Touching intra-night highs of almost 2.40%, yields drifted down to trade at 2.36% currently, after a softer than expected US Philadelphia Fed business survey.

The 2.20%-2.50% range on US 10-year yields, of the past couple of months, remains firmly intact. Ultimately however, as the Fed begins it rate hiking process later this year we see US 10-year yields pushing up toward 2.75%.

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