Influences on NZ rates tugged between US and China data, linked by the Fed's rate hike plans. NZ rate curves steepen

By Kymberly Martin

On Friday night, US yields experienced volatility but 10-year yields closed lower, at 2.12%.

NZ 2-year swap closed up 1 bps, on Friday, at 2.78%, which puts it close to ‘fair value’ based on our central view that the OCR will remain unchanged until the next hiking cycle resumes mid next year. However, we remain of the view, that the market will be inclined at times, during H1 at least, to price further rate cuts. We continue to see a 2.50-2.90% range for 2-year swap over this period.

NZ 10-year swap pushed 3 bps higher on Friday, steepening the 2-10s curve to 82 bps. The shape of the curve will remain significantly influenced by movements in US long yields.

It was a volatile night for US yields on Friday. Yields initially spiked higher across the curve after a stronger than expected US payrolls report. However, the moves prove short-lived. The market remains in a tug of war between signs of an improving US labour market (which should lead to a higher Fed funds rate and yields) and China-focused concerns (depressing risk assets, raising demand for ‘safe haven’ bonds, lowering yields). The two drivers of course are inter-linked, via concerns for the impact of higher US yields, on vulnerable emerging markets; via the impact that global market volatility may have on the Fed’s desire to push forth with rate hikes.

On Friday night, the latter concerns seemed to quickly regain the upper hand.  Equity markets fell, credit spreads widened and US yields soon resumed a downward path. After a brief spiked above 2.2%, US 10-year yields ended the week below 2.12%. US 10-year Treasuries found resistance at this level in December. A break through this level would open the prospect of a return toward 2.0%.

In the meantime, the Friday night’s moves will likely result in a flattening of NZ curves at the start of this week.