Fixed Interest Markets by Kymberly Martin
It was a whippy day in NZ markets, though disguised by closing levels that in most cases were fairly unchanged.
Swap yields initially opened lower. Keen interest to receive the mid-curve saw 3 and 5-year swap yields 5bps lower. Yields climbed into the close however, with 2-year swap closing unchanged at 2.70%.
The late move was assisted by the 3pm release of RBNZ 2-year-ahead inflation expectations. Whilst dipping slightly from 2.86% to 2.82%, they remain well away from a level that would make the RBNZ comfortable with cutting rates. The market has reduced expectations of rate cuts to 17bps in the coming year. The market still prices a 17% chance of a 25bps cut at the next RBNZ meeting on Dec 8. We see virtually no chance of a cut at the meeting and expect this pricing to be squeezed out in coming weeks.
In bond markets, moves were also a bit bumpy. The yield on 21s closed up 2bps at 3.98%. By contrast, Australian bonds continued to rally with their 10-year yields moving down to a new low of 3.95%. This brings the NZ-AU spread back into positive territory around 3bps.
Overnight, the joint Democratic and Republican co-chairs of the US ‘super committee’ made an announcement. They said they had failed to bridge their differences to find a solution in the deficit reduction deal. This sets the stage for sharp clashes on budgetary issues up to the 2012 election. The legally triggered automatic budget cuts do not kick in, until 2013.
US 10-year yields were quite range-bound overnight, trading at 1.98% currently. German equivalents trade at 1.92%. The yields on Italian, Spanish, French and Belgium equivalents are creeping higher again. Rumours circulated overnight of a potential Belgium credit downgrade.
Expect some consolidation in NZ markets today. As we approach the next RBNZ meeting in two weeks, expect the market to review its pricing for some chance of a rate cut. This should put a floor under short-end rates.
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See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.
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