Yesterday, after the long weekend, the local rates market caught up with offshore moves during previous sessions and that meant a bias for rates to fall.
The bond curve showed falls of circa 3-4 bps. The 2-year swap rate fell by 5 bps to 2.24% while the 10-year swap rate fell by 2 bps to 2.83%.
Some traders thought that with the Fed out of the picture in June and the stronger NZD, the risk of the RBNZ cutting rates tomorrow had increased. The OIS market prices tomorrow’s meeting at a 37% chance of a 25 bps cut.
Most see the rate decision as a close call, given recent misfiring communications from the RBNZ and a lack of confidence in what is driving the Bank’s decisions at the moment.
Certainly, the hawkish speech by the Governor in February, followed by the surprise rate cut in March and then the hawkish April OCR review means that anything is possible tomorrow. We err towards a no-cut decision and the Bank maintaining an easing bias.
Overnight, there has been a downward bias to global rates. Germany’s 10-year rate closed at a record low, down 4bps to just below the 0.05% mark. The US 10-year Treasury rate is down 3bps to 1.71%.
Year to date there has been some support around the 1.70% level so it will be interesting to see if rates can sustainably fall below this mark. There are few catalysts this week to take them much lower from current levels.
The US OIS market shows little chance of the Fed tightening in June or July, just 1bp and 5bps priced in respectively. By November, some 13 bps of tightening is priced in, so let’s call it a 50/50 chance of a hike late in the year.
Australian rates sold off after the RBA’s more hawkish tone than expected. Overnight the 10-year bond future has recovered its losses compared to pre-RBA levels, while the 3-year rate is still about 4bps higher in yield.
Daily swap rates
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Jason Wong is on the BNZ Research team. All its research is available here.
3 Comments
RBNZ would have been in a much better situation only if government was doing their part to control the housing Bubble. Best of Luck to RBNZ to work for Financial stability when you can see the storm is building in the housing market and despite warning by one and all the government is watching from the sideline as a spectator. Wish had voted for a more sensitive and active government. Anyway one should learn from the past mistake.
you wont see loan to income this year
Hon BILL ENGLISH: That is hypothetical. The Reserve Bank has yet to investigate whether the tool is workable. Then it has got to decide that it wants to include it in the memorandum of understanding about macro-prudential tools. Then it has got to go out and consult everybody and work out how to apply it.
Grant Robertson: Are there any limits to a debt to income ratio that he will rule out now?
Hon BILL ENGLISH: No, because it is not my role in law to do that. In law, the respective roles are that if the Reserve Bank wants to introduce another macro-prudential tool, then it negotiates with the Government to include it in the memorandum of understanding. The design and application of the tool are, as they should be, the tasks of the independent statutory regulator. Much as the member might think it is appropriate, I do not think the New Zealand Minister of Finance should break the law.
D P
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