US Treasuries higher as stock prices rise. Analysts expecting NZ yield curve to rise from its current mid-range position. Another low CPI raises chance of an OCR cut in April

By Kymberly Martin

NZ swap and bond yields pushed a little higher across the curve yesterday.

Overnight, in the backdrop of positive equity markets US Treasury yields have also inched higher.

NZ 2 and 10-year swap closed at 2.22% and 2.95% respectively yesterday. This leaves the 2-10s curve at 73 bps, around mid the 60-90 bps range it has traded since mid-last year.

Strategically we look for further curve steepening, though tactically see no immediate catalyst. A break above the established range would likely take (i) the RBNZ to cut sooner/more aggressively than the market currently expects (ii) US long-end yields to rebound convincingly from range lows. We see both as probable but would be patient in positioning for this.

This morning’s release of NZ food prices is the final piece of data that could influence our pick for Q1 CPI, due for release next Monday. We currently look for a 0.3% annual CPI number, below the RBNZ’s forecast of 0.4%. This could be sufficient for the market to increase its pricing of an April cut. Current market pricing is for a 40% chance of a cut on 28 April, and that the RBNZ ultimately delivers around 40 bps of cuts in the year ahead.

Overnight, in fairly benign markets, US yields crept higher across the curve. US 10-year yields traded up from 1.73% to 1.77% currently.

US retail sales data may have some bearing on the trading of US yields tonight. Also keep an eye out for the release of China trade data (due today) and financing data (due any day now) that have potential to impact general risk sentiment and hence demand for ‘safe haven’ US Treasuries.

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