Daily swap rates

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Opening daily rate
Source: Westpac
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Source: Westpac
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Source: Westpac
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Source: Westpac
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Source: Westpac
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Opening daily rate
Source: Westpac
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Opening daily rate
Source: Westpac

These are start-of-day swap rates tracked and reported by a major bank.

An interest rate swap is where two people (or counterparties if you want to be technical) agree to exchange two different types of interest rate for a specified period of time.

The amounts of interest exchanged is calculated by multiplying a defined amount (known as the notional principal) by either a fixed interest rate or an interest rate defined by an index on a particular day. An example of an index is the 3 month NZ$ BKBM, which is a fancy way of saying 3 month bank bills.

The charts refer to standard NZ$ fixed/floating interest rate swaps where one person pays a fixed rate (the rate in the chart) every 6 months – this is the fixed leg of the swap - and the other pays 3 month bills every 3 months – this is the floating leg of the swap.

The market standard “notional principal” is NZ$ 20 million and the length of swaps go from 1 to 10 years, with 3 to 5 being the most common.  The notional principal is called “notional” because it is never exchanged.

NZ$ interest rate swap rates are determined by the rates on NZ government bonds and the demand for paying or receiving the fixed rate.  A gauge of the level of demand is the difference between the NZ government bond rate and the swap rate, known as the "swap spread".

The major influences on the level of demand are ...
- corporate borrowers, who have floating rate borrowings;
- banks, who also want to match fixed rate mortgages against their floating rate borrowing; and
- issuers of fixed rate NZ$ bonds, who typically want to pay the fixed rate.

However, because the New Zealand economy is really just "a housing market with a few other bits tacked on", the biggest influence on New Zealand swap rates usually comes from banks working to manage their mortgage rate risk.

3 Comments

Swap rates plummet - looks like they will soon be at the lowest level seen since 2009 - likely they will plunge to a new record low. The banks should soon be offering 1 and 2 year mortgages at around 3.5% and 3 year mortgages at 3.75%. Current mortgage rates in the mid 4% area are far too high - negotiate hard with your bank!

5 year swap rate collapses to the lowest ever seen - surely this means low interest rates for years to come. Collapse in swaps over all timeframes mirrors collapse in oil, dairy and most other commodities - we are heading to deflation and negative government cash rates - just a matter of time.

Seems as though the 10 year swap rate reflecting the semi annual bond equivalent yield of the zero coupon FRA stack trades below the NZ government 10 year note yield. How can 10 year bank bill risk present a lower risk profile than the taxing authority of the New Zealand Government? - Answers on a post card please.