Curves get steeper

NZ 2yr swap rate may fall below 1.9% if OCR is cut as markets expect. "Little urgency for borrowers to hedge short-dated rate risk"

Bonds

NZ 2yr swap rate may fall below 1.9% if OCR is cut as markets expect. "Little urgency for borrowers to hedge short-dated rate risk"

9th Aug 16, 8:29am by Kymberly Martin

By Kymberly Martin

NZ curves steepened yesterday as long-end yields closed up 5-6 bps, while short-end yields closed little changed.

Overnight, US 10-year yields traded 1.57% to 1.61%.

NZ yields pushed higher from the open, following the moves offshore on Friday night, prompted by the strong US payrolls report. In the afternoon, NZ short-end yields declined back to previous levels. This occurred alongside the release of a BNZ note ‘Slash or Burn’ in which we revised our OCR view. We now anticipate the RBNZ will cut the OCR to 1.50% by year-end (previously 1.75%). We see 25 bps cuts at the August, September and November meetings.

Heading into Thursday’s RBNZ meeting the market fully prices a 25 bps cut. So unless the Bank pulls a 50 bps cut out of the hat (not impossible, but highly unlikely in our view), any market response will be a result of the Bank’s indications of future action.

The market currently prices around a 1.62% trough in the OCR within the year ahead. So the Bank will need to imply more cuts than this (through its updated 90-day bank bill track or discussion of ‘risks’) for yields to dip further on the meeting. There are always challenges in nuancing a message. The risk is the market views the Bank’s intentions as less dovish than current market pricing, and yields bounce off their lows. However, this would simply set up a renewed receiving opportunity in our view.

Consistent with our revised OCR view we see NZ 2-year swap trading below 1.90% in the weeks/months ahead. We continue to see little urgency for borrowers to hedge short-dated rate risk.

In the usual post-payrolls lull, US 10-year yields traded in a range overnight. Yields briefly touched above 1.61% in the early hours of this morning, but have returned to 1.58%.Yields remain in the upper-end of their post-‘Brexit’ range. But we believe they will face continued near-term resistance in trying to break through July highs at 1.63%. This is especially true when US-UK 10-year spreads are near historic highs, at 97 bps, and US-German spreads are also within the upper-end of ranges, at 165 bps.

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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1 Comments

by Stephen Hulme | 9th Aug 16, 11:40am 1470699655

The mainstream, dominant view of monetary policy remains as if it were “accommodative” or “stimulus.” Low rates and/or balance sheet expansion are treated as one and the same in terms of economic effects. The mountain of economic evidence since the end of the Great Recession, however, argues that that view is backward; starting with the observation that the Great Recession itself was no recession.

This is a universal problem and not just one for which the Federal Reserve and the United States economy will suffer. As I wrote earlier today with regard to China’s recalcitrant imports and PBOC policy:

Instead, by view of the “dollar”, it becomes clear that China’s central bank policies rather than being “stimulus” were not proactive but merely reactive efforts to counteract the “rising dollar.” Thus, as in the US, Europe, and Japan, monetary policy doesn’t tell us anything about what will happen, it is rendered an indication of what already did.

This is the determined view of bond and funding markets all over the world. Low and even negative rates don’t indicate an economic friendly financial environment, they prove the exact opposite as financial agents are betting directly against it. Therefore, when policymakers tell us, as they constantly do, that interest rates and other monetary policies must remain “accommodative” for an extended period even after nearly ten years already so, what they really mean is that they are merely following the economy down. Read more