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After all the RBNZ and ECB moves that brought a number of surprises, the result may be a steeper NZ rate curve

Bonds
After all the RBNZ and ECB moves that brought a number of surprises, the result may be a steeper NZ rate curve

By Kymberly Martin

Following the surprise cut by the RBNZ yesterday, NZ swap and bond yields closed down 10-20bps.

US and German yields experienced a tumultuous night after the ECB’s announcement, but now sit somewhat higher.

The RBNZ delivered a 25 bps cut yesterday, against broad consensus expectation that the cash rate would be left steady at 2.5%. The Bank appears to have taken fright at a downshift in global growth, uptick in market volatility and rising bank funding costs, against the backdrop of increased risks to the domestic dairy sector but stubbornly resilient NZD.

The Bank stepped aside from its general pattern of taking policy actions only once the market had priced a high probability of such action. (There was less than a 25% chance of a cut priced ahead of yesterday’s meeting). This may have been deliberate in the hope that the move would ‘shock’ the NZD lower. It remains to be seen if yesterday’s sharp drop in the NZD can gain momentum.

The NZ curve steepened as 2-year swap gapped lower to close down 20 bps, at 2.24%. The market now prices a low in the OCR at around 1.93% by the end of the year. The next 25 bps rate cut is fully priced by around mid-year. Yesterday the RBNZ seemed keen to steer the market away from the idea of a follow-up cut at its next meeting in April.

NZ 10-year swap closed down 11 bps, at 2.98%, a new historic low. Similar magnitudes of moves were seen in NZGBs, with the yield on NZGB27s closing at 2.92%.

Overnight, German yields initially led US yields lower after the ECB announced it had cut its deposit rate by 10 bps to -0.4% and additional measures. Termed ‘TLTRO II’, the ECB is now offering banks a new unlimited liquidity facility, which will start in June 2016. Banks can borrow unlimited amounts at whatever the prevailing MRO is (currently zero). But if banks lend that money, they can gain additional discounts, to a maximum of the current -0.4% deposit rate. In other words, banks that fulfil reasonably meagre lending requirements could be paid by the ECB to lend.

The ECB also said that towards the end of Q2, investment grade non-bank corporate debt would become eligible to be bought as part of its QE programme.

However, ECB’s Draghi ended his press conference by saying “we do not anticipate reducing rates further”. This appears to be the sound-bite that markets have grasped onto. German 10-year yields traded off early morning lows near 0.15% to sit at 0.30% currently. US 10-year yields have traded from 1.86% up to 1.94%. This could result in a little further steepening pressure on the NZ curve today.

Daily swap rates

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Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Kymberly Martin is on the BNZ Research team. All its research is available here.

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1 Comments

"ECB’s Draghi ended his press conference by saying “we do not anticipate reducing rates further”.
How many times have we heard that!
Get real Kymberly the rate curve trend is down and there is a long way to fall yet! You economists and researchers should give up - your predictions have been consistently wrong since 2007
ps where is Tony Alexander - heard nothing from him lately.

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