OCR priced at under 2%

Market expectations for OCR to be cut one more time; NZ swap and bond yields fall; Yellen says it's appropriate for the Fed to raise rates if economic growth picks up

Bonds

Market expectations for OCR to be cut one more time; NZ swap and bond yields fall; Yellen says it's appropriate for the Fed to raise rates if economic growth picks up

30th May 16, 8:04am by Kymberly Martin

By Kymberly Martin

On Friday, NZ swaps closed down 1-2bps while NZGB yields closed down 4-9bps. US yields pushed a little higher ahead of a long weekend in the US.

NZ 2-year swap closed down 2bps on Friday, at 2.25%. The market prices a trough in the OCR at 1.97% within the year ahead (from 2.25% currently). However, it assigns less than a 30% probability to a cut next month.

NZGBs performed well on Friday, assisted by a very strong tender of NZGB 2033s in the afternoon. It attracted a 4.7x bid-to-cover ratio. The bonds were sold 2-3bps inside where they were marked prior to auction. Consequently, swap-bonds spreads have pushed up to test the top of nine month ranges. The LGFA (Local Government Funding Agency) has also announced it intends to issue a new 2025 bond via its next tender on 15 June.

On Friday night, in her much awaited Harvard University appearance, Fed Chair Yellen endorsed recent Fed rhetoric. She noted it would be “appropriate” for the Fed to raise rates if economic growth picked up as expected and the labour market continued to improve. However, she did not hint at any particular meeting, saying instead it would be appropriate “probably in the coming months”.

The market prices a slightly greater chance of an imminent hike. The OIS market has almost 10bps priced for the June meeting and almost 20bps priced by the July meeting.

US Treasury yields popped higher on Yellen’s comments. They ended the week a bit higher across the curve. US 2 and 10-year yields closed at 0.91% and 1.85% respectively.

Daily swap rates

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Source: NZFMA

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

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5 Comments

by dictator | 30th May 16, 10:18am 1464560283

The Fed is going to proceed slow and careful. They know there's no rush to increase unlike RBNZ. Pricing for 2% makes perfect sense as it will happen.

by Stephen Hulme | 30th May 16, 10:23am 1464560623

US Treasury yields popped higher on Yellen’s comments. They ended the week a bit higher across the curve. US 2 and 10-year yields closed at 0.91% and 1.85% respectively.

This spread at 94 bps forecasts grim future economic well-being - why did extraordinary low short term interest rates fail to ignite US growth consistent with higher term yields?

by dictator | 30th May 16, 10:52am 1464562365

The US "recovery" is mild to non-existent. All the Fed is doing is moving away from the liquidity trap.

by Stephen Hulme | 30th May 16, 11:53am 1464565986

Same in Europe.

A prolonged period of negative interest rates is failing to revive investment at Europe’s companies, with the vast majority of businesses in the region saying the stimulus measures have had no affect at all on their growth plans.

Some 84 percent of the 9,440 companies surveyed by Swedish debt collector Intrum Justitia AB for its European Payment Report 2016 say low interest rates haven’t affected their willingness to invest. And perhaps more alarmingly, the number is up from 73 percent last year. Read more

by dictator | 30th May 16, 1:18pm 1464571092

Stimulus from mortgages goes to people that have sold houses to their bank account. I'd be interested to know where the money is flowing, if at all. It's either going back into property, other investments or sitting in a bank account. Trickle down doesn't happen, capital accumulates if it doesn't go to the non-saving portion of society.