Wholesale rate curve may get more flattening pressure in period of consolidation. Eyes on China data

By Kymberly Martin

NZ swaps closed little changed on Friday. However, NZGB yields closed down 3-6 bps across the curve.

US 10-year yields closed for the week at 1.64%.

After the excitement of Thursday’s RBNZ meeting, Friday was a day of relative consolidation for NZ swaps.

NZ 2-year swap closed at 2.31%. However, this is down 5 bps fromThursday’s intra-day highs. We continue to see yields trading lower from range-highs in coming weeks/months, as the market inches up expectations for RBNZ rate cuts.

Currently the market prices less than one 25 bps rate cut within the year ahead. We place a high probability on a cut at the August meeting, especially if the NZ TWI remains stubbornly high.

The decline in NZGB yields on Friday mimicked the previous night’s moves offshore. The NZGB curve flattened slightly as longer-dated NZGBs closed down 6 bps. This helped to stabilised NZGB-UST spreads that had pushed out in recent days. We see these spreads remaining fairly dependent on the direction of US Treasuries. We expect NZGBs to outperform when UST’s sell-off but underperform on rallies, within a 50-100 bps range for 10-year spreads.

On Friday night, in the backdrop of soft equity markets and lower oil prices, US yields traded lower. US 10-year yields ended the week at 1.64%, their lowest level since their brief plunge lower in mid-February. This will likely keep a bit of downward pressure on the long-end of the NZ curve at the start of the week.

A large slew of China data, due this afternoon, will set the general tone for markets. Any hints of disappointment would strengthen demand for ‘safe haven’ US Treasuries. REINZ house sales data is also due sometime this week. These may simply re-highlight the dilemma the RBNZ faces as it weighs the risks of a bubbling housing market against those of low inflation and a strong NZ TWI.

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