Markets see no more RBNZ cuts. UST 2yrs push to 2016 highs. Local eyes on waning interest in NZGBs

By Kymberly Martin

While NZ short-end yields were fairly well anchored, longer-dated yields declined 3-4 bps yesterday.

Overnight, US 10-year yields traded between 2.18 and 2.24%.

NZ 2-year swap closed down 1 bps, at 2.27% yesterday. The market (correctly, in our view) still prices little chance of any monetary policy response to the ongoing impact of recent central NZ earthquakes.

The market prices less than a 5% chance of an OCR cut in coming months. It prices a first OCR hike in H1 2018. This is aligned with our own view. Hence we see current 2-year swap as close to ‘fair value’.

The longer-end of the NZ curve had a much more turbulent time yesterday. Both swap and bond yields initially opened higher, but subsequently declined throughout the afternoon. From morning highs above 3.37%, NZ 10-year swap closed at 3.28%. NZ ‘generic’ 10-year bonds traded from late morning highs near 3.20%, down to 3.09% at the close.

Overnight, long yields in core offshore markets consolidated below their early-week highs. US 10-year yields traded between 2.18% and 2.24%, currently at 2.22%. US 2-year yields meanwhile pushed a fraction higher, to 1.01%, their highest level since early-January. The US OIS market prices more than a 90% chance of a Fed hike next month.

Shortly, US Fed’s Vice Chair Fischer is scheduled to speak. No doubt these comments will be perused for monetary policy implications. This afternoon, October data showing non-resident holdings of NZGBs will be released. Recall, these slipped to 65% in the previous month, from mid-2015 highs near 70%.Though levels are still above average, we would start to take note of any further slippage.

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