NZGB yields make gains that held, despite offshore equivalents failing to hold theirs. Markets add to Fed hike expectations

By Kymberly Martin

There were fairly modest moves in NZ swaps yesterday.

By contrast, NZGB yields closed 1-5 bps higher.

Overnight, US short-end yields pushed higher but 10-year yields remain stuck at 1.84%.

With a week to go until the RBNZ’s next meeting (which will be accompanied by a full Monetary Policy Statement), the market prices only slightly more than a 20% chance of a cut at the meeting. However, it still prices a full 25 bps cut within the year ahead. Reflecting this, NZ 2-year swap trades at 2.30%, down 1bps on the day.

It was an interesting day of trading in the AU market yesterday. After the stronger than expected AU Q1 GDP release, AU swap and bond yields gapped higher. However, as the afternoon progressed yields drifted lower to end at, or below, yesterday morning’s levels. However, NZGB yields that pushed higher along with the initial move in AU equivalents, failed to subsequently fall back. The yield on NZGB 2027s closed 5 bps higher, at 2.65%.

The US manufacturing ISM came in above expectations, pushing further into expansion territory. This helped boost US short-end yields. US 2-year yields closed up 2 bps, at 0.90%. The market now prices 15 bps of Fed hikes by the July meeting. Longer-dated US yields also pushed higher after the data release, but only reversing their late evening decline. 10-year yields remain stubbornly at 1.84%

The NZ GDT dairy auction overnight, recorded a further 3.4% gain. This should prevent the market feeling the need to increase pricing of an imminent OCR cut.

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