RBNZ keeps short end swaps down, US Fed pushes long end up. Curve steepens

By Kymberly Martin

NZ swap and bond yields closed up 3-7 bps on Friday.

On Friday night, US 10-year yields continued their push higher, ending the week at 1.98%.

After Thursday’s cut by the RBNZ caught the market by surprise, the market’s attention returned to offshore drivers on Friday. NZ long-end yields followed the post-ECB meeting rise in offshore yields. NZ 10-year swap closed up 6 bps, at 3.04%, while the yield on NZGB 2027s closed up 7 bps, at 2.99%.

These moves resulted in a steepening of both curves, as short-end yields were more anchored by the continued anticipation of further RBNZ rate cuts.NZ 2-year swap closed up 3 bps, at 2.27%, as the market prices that the OCR will be cut to around 1.96% by this time next year.

In an interesting divergence on Friday night, US 10-year yields traded higher in the background of generally improved risk sentiment and a higher oil price, while German yields traded lower. German 10-year yields gave back some of their post-ECB meeting rise. However, as they ended the week at 0.27% they are still well above their pre-ECB level.

US 10-year yields ended the week at 1.98%, their highest level since the start of February. Ahead of the US FOMC’s meeting on Wednesday, the market prices virtually no chance of a further hike this week. But almost an 80% chance of 25bps hike by year-end is priced. We expect at least one further hike this year.

This afternoon, look out for the latest update of non-resident holdings of NZGBs. At the last reading in January these stood at 68%, well above long-term average. We suspect that NZGBs will remain relatively attractive to offshore investors (despite yields being near historic lows) in a world of low/negative yields.

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