NZ swaps closed down 1-3 bps, with some further flattening of the curve.
Overnight, US 10-year yields dribbled down from 2.26% to 2.22%.
In the absence of domestic data releases the market followed the downward drift in yields seen offshore. NZ 2-year swap closed down 1 bps at 2.87% while 10-year closed down 3 bps, at 3.63%. The market prices an OCR that is cut to 2.55% by April next year, from its current level of 3.00%. Our central case remains a 2.50% OCR by October.
Across the Tasman the market prices that the RBA will cut the cash rate to just below 1.75% by mid next year. Our NAB colleagues see it as more likely that the RBA will keep the cash rate unchanged at 2.00% for a prolonged period. At present the NZ-AU 2-year swap spreads sits at 82 bps, down from 160 bps just a few months ago. However, we believe this spread could narrow further in the months ahead if respective central bank activity pans out as we expect.
Overnight, German and US yields dribbled a little lower, despite a better than expected German Ifo survey and ok US durable goods orders numbers.
The “safe haven” bonds appeared to be in demand as the China equity market rout reasserted itself and commodity prices continued to fall. Fed funds futures now price just a 0.30% Fed funds rate by year-end from its current range of 0-0.25%.
Today there are no domestic data scheduled as the market awaits two key events; tomorrow morning’s RBNZ speech and tomorrow night’s US FOMC meeting.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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