Combination of US FOMC announcement and Australian 10-year swaps moving higher contributed to steepening of NZ yield curve

By Kymberly Martin

NZ swaps closed up 3-5bps yesterday and NZ bond yields were up 5-7bps.

Overnight, US benchmark 10-year yields pushed back up to 2.56%.

Yesterday’s RBNZ statement was fairly neutral to slightly dovish.

We have pushed back our expected starting point for RBNZ rate hikes from March until June. We still see a steady pace of rate ‘normalisation’ thereafter, taking the OCR to a peak of 4.50% in 2H 2015. Risks around this central view are now evenly balanced.

However, yesterday’s move higher in NZ swaps, and steepening of the curve seemed to more reflect offshore moves in rates. This was set in motion by the US FOMC statement and saw Australian 10-year swaps move about 9bps higher on the day. In terms of flow we have also seen some corporate paying interest in the mid to 10-year part of the swap curve.

NZ bonds closed up 6-7bps yesterday, with 10-year yields at 4.54%. In the year ahead we see a 4.50-5.00% range containing NZ 10-year bond yields. This is consistent with the 2.50-3.00% range we see on US 10-year bond yields.

Overnight, US 10-year bond yields took a step higher to 2.56% after the Chicago PMI provided a significant positive surprise.

Today there is little scheduled on the domestic agenda. Following the moves seen in the US overnight (mimicked in AU bond futures), we would expect NZ yields to open up today with a steepening bias to the curve.