Swap long end follows the US, short end rates fall. Eyes on RBNZ and raft of China data

By Kymberly Martin

There was further steepening of the NZ swap curve yesterday while NZGBs continued their sell-off.

Overnight, US 10-year yields traded between 2.31% and 2.35%.

Once again, there was not too much on the domestic agenda to drive rates yesterday. Rather, the swap curve continued to steepen a little further, as the long-end followed US moves higher. By contrast, NZ 2-year swap closed down 1 bps, at 2.81%. This is close to ‘fair value’ based on our central view the RBNZ cuts the OCR to a cyclical trough of 2.50% at its Dec meeting.

However, we still think yields will trade a 2.65-2.90% range around this level, in the near-term, in response to local data flow. Tomorrow’s AU employment report, for example, may cause NZ short-end yields to directionally follow any response by AU equivalents.

NZGBs sold-off 7-8 bps across the curve yesterday, underperforming their US counterparts. This has taken NZGB-UST spreads back to mid-ranges, following NZGB’s solid outperformance through Oct. We continue to see NZGB’s generally outperforming during sharp sell-offs in US Treasuries, but underperforming during periods of UST consolidation or rally.

Today the RBNZ will release its financial stability report. This will no doubt focus on dairy and housing, two key areas of risk. Concerns about the latter would add weight to our view of the RBNZ as a ‘reluctant cutter’. It does not wish to add fuel to the increasingly-nationwide housing fire, by aggressively cutting rates.

This afternoon, China releases a host of data, including industrial production and retail sales. This has potential to inform general market risk sentiment as we head into an otherwise quiet night on the data front.

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