On Friday, NZ yields followed offshore peers higher and the curve steepened.
On Friday night, US yields spiked higher after a solid payrolls report, but later returned to below previous levels.
NZ swap and bond yields pushed higher from the open, following the ECB-inspired moves offshore the previous night. As would be expected, the greatest pressure was felt on long-end yields.
NZ 10-year swap closed up 9 bps, at 3.62%, taking the 2-10s curve to 87 bps.
NZGB yields pushed higher by a more uniform 3-5 bps across the curve. This resulted in wider long-end swap-bond spreads. We would remain buyers of NZGB23s against swap, as we believe swap spreads can widen further within a 10-40 bps range.
Friday night was all about the US payrolls report. The solid 211,000 release (slightly above expectations) looks to have cemented the case for a Fed hike on 16 December. However, the market continues to price this probability at around 75%.
On the release, US 10-year yields initially spiked from 2.30%, toward their early-Nov highs of 2.37%. However, the move proved short-lived. Yields soon declined to their earlier levels and later slipped further, to end the week at 2.27%. The latter move was likely assisted by a declining oil price as OPEC concluded its meeting and confirmed it would not make any production cuts.
The late rally in US Treasuries will likely prevent a meaningful sell-off in NZGBs today. The domestic market will now be looking ahead to Thursday’s RBNZ meeting. Ahead of this, the market prices around a 45% chance of a cut. A 25 bps cut remains our central view, taking the OCR to a cyclical trough of 2.50%, throughout 2016.