The NZ swap curve flattened yesterday while NZ bond yields declined 3-4 bps across the curve.
Overnight, US 10-year yields traded between 2.20% and 2.24%.
It was an interesting day for NZ swaps. Initially they took their cue from the decline in US yields, falling 5-7 bps across the curve.
However, some flow in the afternoon reversed the move, with NZ swaps closing for the day down just 2 bps at the long-end of the curve. NZ 2-year swap remains at 2.72%, as the market prices around a 60% chance of a RBNZ cut tomorrow.
By contrast, NZGB yields took their prompt from offshore and close down 3-4 bps across the curve, further widening swap-bond spreads. But the move in NZGBs was insufficient to prevent widening of NZ-US and NZ-AU 10-year bond spreads. We maintain that NZGBs will be vulnerable to underperformance when USTs rally, but will outperform on sharp US-led sell-offs in bonds.
In a quiet US data night, with some stabilisation in the global oil price, US 10-year yields have managed to consolidate in a relatively tight range. They currently trade at 2.21%.
There is little on the data calendar to drive domestic or offshore yields today. Rather, the local market will remain firmly focused on tomorrow’s RBNZ meeting.
Although it is a close call, we come down on the side of expecting a rate cut. This would take the OCR to a cyclical trough of 2.50%. We see the Bank as reluctant to cut beyond this level, though we suspect the market will be inclined to price further cuts through much of the early part of next year.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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