It was a quiet day in the NZ market. Swap and bond yields closed within 1-2 bps of flat. Overnight, while US 10-year yields traded in a range, German equivalents traded lower.
NZ 2-year swap closed just 1 bps higher, at 2.41% yesterday. Market pricing is now fairly closely aligned to our own view that the OCR will be nudging toward 2.75% in two years’ time. i.e. the RBNZ will have delivered 100 bps of rate hikes.
However, the starting point of the hiking cycle will remain open for debate. The market currently has a first hike priced by November this year. The RBNZ’s meeting on 9 February will provide it with an opportunity to influence this pricing if it feels necessary. Recall, as at the last MPS the RBNZ’s published OCR track was pretty much flat at its current level, right through to the end of the forecast period (end-2019).
The yield on NZ generic 10-year bond yields again closed at 3.18%. This is 30 bps below its late-December highs. Our central forecasts see yields trade a range between around 3.0-3.6% in the year ahead as US 10-year yields trade a range around 2.5%.
Overnight, in the absence of key US data flow, US 10-year yields trade a tight range between 2.36% and 2.39% (though dipping a little following a recent solid Treasury auction). Meanwhile German equivalents drifted down from 2.37% to 2.32%. UK yields showed limited response to comments from Bank of England’s Carney this morning. He defended the BoE’s actions to mitigate ‘Brexit’ risks, but said the risks of near-term disruption to the economy had diminished since the June referendum. The market prices around a 30% chance of a BoE rate hike by the start of next year.
Once again the data calendar suggests a fairly unexciting 24-hours ahead, unless some political or corporate news flow turns up to ruffle markets. There are a slew of Fed members scheduled to speak tomorrow morning, so the market may be looking to dissect their contrasting points of view.