The NZ curve flattened yesterday, taking its cue from offshore moves.
Overnight, US 10-year yields pushed up from 2.18% to 2.23%.
In the absence of domestic data releases yesterday, NZ 2-year swap closed only fractionally lower, at 2.89%. However, longer-dated swaps took a nudge lower following the previous night’s moves offshore. NZ 10-year swap closed down 4bps, taking the 2-10s curve down to 76 bps.
However, we continue to look for NZ 2-10s swap curve steepening within a 70-125 bps range through to year-end.
This is premised on our view of (i) near-term RBNZ rate cuts that take the OCR to 2.50% by Oct (market pricing is for a 2.68% OCR by end-Oct) and (ii) our expectation the beginning of the Fed rate hiking cycle will be the catalyst for some rise in US long yields (dragging NZ equivalents higher).
In a data-light night US 10-year yields drifted higher along with a 2% rise in the WTI oil price. From 2.18%, yields trade at 2.23%, now some way from the lower-end of ranges.
Some comments from Fed Vice Chair Fischer caught some attention late last night. He said he believed a large part of current low inflation is temporary and the US economy has nearly achieved full employment.
However, the market still prices just over a 50% chance of a Sept Fed rate hike. US 2-year bond yields actually traded a fraction lower after the comments, to sit at 0.73% currently. We continue to see the Fed raising rates by year-end for the first time in seven years, with Sept a likely starting point.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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