Low and falling rates likely until US Fed rise is likely and Brexit is behind us. NZGB 2027 yield falls to new low

By Kymberly Martin

Taking their cue from offshore, NZ swap and bond yields closed down 2-6 bps yesterday.

Overnight, US 10-year yields traded a tight range between 1.61% and 1.64%

It was a relatively quiet start to the week locally as Australia celebrated the Queen’s Birthday. With an absence of domestic data releases, NZ yields took their cue from Friday’s move lower offshore. Most of the impetus was felt at the long-end of the curve. NZ 10-year swap closed down 4 bps, at 2.80%, an historic low.

Longer-dated NZGBs have also been a beneficiary of the decline in global risk appetite and global bond yields. NZGB 2027 yields closed down 5 bps, at 2.51%, also a new low.

Until there is a turn in offshore yields (unlikely until the UK referendum uncertainty has passed or a Fed rate hike appears imminent), NZ long-end yields are likely to remain under downward pressure.

Overnight, in the backdrop of weak equity markets, US Treasuries traded in a range. US 10-year yields now sit near the lower-end of this 1.61-1.64% range. Ahead of Thursday morning’s US FOMC meeting the market prices little chance of a Fed rate hike any time soon. It prices only slightly more than a 50% chance of a 25 bps hike by year-end.

We continue to expect at least one more hike this year. However, it will be dependent on the soft US May payrolls report proving to be something of an outlier. It will also require market stability to resume after the UK referendum.

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