The relentless steepening of the NZ curve continues.
While short-end yields were contained, NZ long-end yields pushed 7-10 bps higher yesterday.
Overnight, USTs led a further sell-off in global bonds, taking US 10-year yields to intra-night highs of 2.30%.
The primary driver of NZ yields, at present, continues to be global rather than local. Much of the country yesterday was subjected to continuous aftershocks following the severe earthquake that struck the upper South Island very early on Monday morning. However, the rates market was not inclined to price any implications from a monetary policy perspective.
The full human and financial costs will not be known for some time. Our attention remains on the former, for now. However, the market has not moved to price increased chance of OCR cuts. Recall, 5 0bps of cuts followed soon after the early 2011 Canterbury earthquakes. But at that time the OCR was at 3.0% (now 1.75%); it initially appeared the damage overall was greater; and the economy was potentially not on such a sound footing, as it was this time, heading into the event.
For now the market continues to price virtually no chance of further OCR cuts, and prices some chance of rate hikes from late next year. NZ 2-year swap closed up 1 bps yesterday, at 2.28%.
Overnight, US yields continued their rise, still largely being driven by rising long-term inflation expectations. After opening for the week at circa 2.17%, US 10-year yields briefly touched above 2.30% early this morning (their highest level since early-January) before drifting back to 2.22%. German equivalents also made intra-night highs approaching 0.40%, before returning to 0.33% currently.
US short-end yields have traded a similar pattern, although the overall magnitude of moves has been more contained. The US OIS market now prices around a 90% chance of a hike at the Fed’s 14 December meeting. It also prices a second hike by the end of next year.
There is a full calendar of events domestically and globally scheduled for the coming 24-hours, though US yields will likely remain the key driver of direction for local yields.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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