Two year swap may trade down to 2% in coming weeks/months, a -20 bps fall from here, says BNZ. Eyes today on inflation expectations

Two year swap may trade down to 2% in coming weeks/months, a -20 bps fall from here, says BNZ. Eyes today on inflation expectations

By Kymberly Martin

Taking their lead from offshore moves, NZ swap and bond yields closed down 6-11 bps yesterday.

Overnight, US 10-year yields pushed higher but have subsequently subsided to trade at 1.82%.

The NZ market remains a little quiet following the Easter break and ahead of the pending syndication of the NZDMO’s new nominal NZGB 2025.NZ1-2b will be issued, subject to market conditions. However, both swaps and bonds took their cue from yesterday morning’s post-Yellen decline in offshore yields.

NZ 2-year swap closed down 6 bps, at 2.22%, a new historic low. We continue to expect that 2-year swap can trade down toward 2.00% in coming weeks/months as the market increases expectations for future RBNZ rate cuts. Currently the market prices around 38bps of cuts within the coming 12 months. We would not be surprised to see this pricing extend to 50bps.

Today brings this week’s domestic data highlight, the ANZ business survey. The headline readings could move either way, but the rates market may give more attention to the survey’s one-year-ahead inflation expectations series. Inflation expectations are the RBNZ’s current focus, and this is one of the measures it tracks closely. A further fall could encourage the market in its rate cut expectations.

At the longer-end of the NZ swap curve, 10-year swap declined 10 bps yesterday, flattening the 2-10s curve to 79 bps.

US 10-year yields traded around the 1.81% level for much of the evening. They pushed higher early this morning after the release of the US ADP employment report that came in marginally ahead of expectation, and mimicking a push higher in the oil price. However, the push toward 1.86% was not sustained, as the oil price has subsequently declined. Yields have drifted back to 1.82% currently. They remain well within the 1.75-2.0% range that we see containing trading near-term.

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

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What will be the excuses this time from banks then? Lending rates should be lower.

But the banks have been complaining of higher wholesale rates, that they are suffering under and absorbing? Is that the actual truth?.

Secret men's business - Don't ask - Don't tell

The constant Bank refrain is higher wholesale rates - but ACTUAL data is never revealed

How can we not believe? - it must be the truth - repeated often enough it becomes the truth

Check bank CDS spreads Iconclast, well higher in recent months and accordingly the price they're paying over the wholesale curve for their money. They've absorbed it to date, got some back by not passing on the same benefit to borrowers than the cost to savers with the OCR cut, not yet actually raising the rate to borrowers as is happening in Australia without OCR hikes, but suspect its coming unless the RBNZ can "out cut" the problem..

From DC's "around the traps today"

WHOLESALE RATES AT HISTORIC LOWS
Local wholesale swap rates fell again today by -2 and -3 bps across the whole curve.
That means that every term is now at a record low.

They (ANZ) complained about higher foreign wholesale funding costs - those that are not specified here.

In its statement announcing the 10 basis points cut to its floating and flexible home loan rates, ANZ said over the past 18 months offshore wholesale funding costs had increased significantly. International volatility had proved to be more than temporary, and these extra costs now need to be reflected in ANZ's lending rates.

I guess it's easy to manipulate the local market, but not the foreign lenders, who demand higher returns to compensate for increased credit risk exposure.

So can you estimate the actual likely wholesale rate/s matching various retail mortgage rates, e.g. 1 yr retail at 4.25 funded by ? wholesale rates ?, 2 yr rate of 4.6 funded by wholesale rate of ?, etc.
And have these rates really been rising?

No - I am not a bank treasury funding officer, but one year US Libor rates have risen from ~70bps to 124 bps over the last year and the credit risk premium for Australian banks has certainly risen too - you need to investigate that factor yourself. Moreover NZD/USD cross currency swap counterparties are absent given recent sinking basis quotes - NZ banks are the basis payers. Read more and more

Seems the new definition of 'floating' means retail rates 'bob' while wholesale rates 'sink'?

Hmmm- the swap to government spread is flat in the 10 year slot - where and how does the RBNZ explain the risk distortion away? Is ANZ a net payer of collateral to counterparties on the otherside of it's one plus $trillion IRS book. Is it a case of OBR bound depositors underwriting a possible dislocation for a foreign derivative counterparty's benefit?