Aussie rate cut prospects evaporate. NZ swap and bond yields rise following USTs. Eyes on foreign appetite for NZGBs

Aussie rate cut prospects evaporate. NZ swap and bond yields rise following USTs. Eyes on foreign appetite for NZGBs

By Kymberly Martin

NZ swap and bond yields closed up 2-6 bps yesterday, with a slightly steeper curve.

Overnight, US 10-year yields traded a relatively tight 2.31-2.34% range.

The moves in the NZ market yesterday afternoon largely took their cue from those across the Tasman. After the strong AU employment report, AU 3-year swaps gapped higher. From 2.14%, yields soon found themselves above 2.26%. But the move was not sustained. Subsequently yields have drifted back down to 2.17%.

However, the market has clearly now reduced its expectations for further RBA rate cuts. It now prices less than 20 bps of cuts by mid next year.

NZ 2-year swap closed up 2 bps, at 2.76%, while 10-year closed up 4 bps, at 3.67%. Meanwhile the yield on NZGB 2027s has pushed another 6 bps higher, to 3.57%, its highest level since mid-July. From a technical perspective the bonds will likely find some support as yields approach 3.60%. However, direction will largely remain driven by USTs. We will also be closely watching for data released this afternoon showing current non-resident holdings of NZGBs. These had ticked down to 68.7% in Sept from 69.5% previously. We are keen to gauge if this is the start of a more ominous downward trend.

Overnight, in the backdrop of weak equity markets and a declining WTI price, US 10-year yields drifted a little lower in the early hours of this morning. From above 2.34%, yields now trade around 2.31%. The market continues to price almost a 70% chance of a Fed rate hike at its 16 Dec meeting.


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

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