NZ swap rates down 2bps across the curve; UST yeilds up as market prices in more than two rate hikes for 2017

By Jason Wong

US Treasury yields were on a slightly higher plane throughout the local trading session yesterday, and the strong employment and ISM data have seen further upside pressure. The 10-year rate almost reached 2.52% but has since settled to just under the 2.50% mark, up 4bps for the day. The 2-year rate reached a fresh high for the year of 1.26%, with the data mentioned seeing the OIS market price in the chance of firmer Fed policy this year. The market is back to pricing in a full hike by June (26bps) and more than two hikes by year-end (56bps). The March meeting looks a little under-priced, with 10.5bps priced in. Continued strong data and an outline of the government's fiscal plans by then makes the March meeting “live”, an idea the Fed will want to keep open-minded about.

The local rates market outperformed yesterday, with downside pressure on rates following NZ’s labour market data at time when US and Australian rates were moving higher. Swap rates were down 2bps across much of the curve, with the 2-year rate closing at 2.43% and the 10-year rate down to 3.57%.

The OIS market prices little chance of the RBNZ tightening in the first half of this year. Pricing for August slipped a couple of basis points to 1.83%, suggesting a 32% of a 25bps tightening, while a full rate hike remains priced for the November meeting. While August seems too early for the RBNZ to kick off a tightening cycle, we think that November is certainly “live”, considering the momentum of the economy and compelling evidence that core CPI inflation is rising. BNZ economists are picking a 1H18 hike (May) with the balance of risk weighed towards an earlier tightening.

NZ PM English gives his state of the nation speech around lunchtime and it isn’t expected to be market moving.

Jason Wong is on the BNZ Research team. All its research is available here.