US payroll data saw global long yields surge. NZ will play catch-up today

by Kymberly Martin

The NZ swap curve ended the week a little flatter, ahead of the national holiday yesterday.

Friday’s US payroll data saw global long yields surge. NZ will play catch-up today.

Last week, there was little to change market expectations for no action from the RBNZ in the year ahead. This kept short-end yields contained. However, some pullback in long-end yields, following offshore moves, saw the swap curve flatten. The 2s-10s curve closed at 130bps, close to late 2011 lows.

NZ long-end bond yields also closed down on the week, with 10-year yields flirting with December lows. The yield on NZGB21s closed at 3.77%.

However, early Saturday morning, markets were hit by stellar US payroll data closely followed by the non-manufacturing ISM (56.8 vs. 53.2 expected). US and German 10-year yields gapped higher on the first release, as their “safe haven” appeal faded. 10-year yields jumped from 1.82% to 1.92%, currently trading at 1.90%.

As a result, the NZ-US 10-year yields spread moved from the upper edge of its range at 2.05% last week, to the lower edge of its range (1.86%) currently. Similarly, a 12bps surge higher in AU 10-year yields yesterday has seen the NZ-AU spread fall to -7bps. This is now at the bottom of its range, having been at 15bps a week ago.

We therefore expect NZ long yields to rise to play ‘catch-up’ when the market opens today, after the Waitangi day holiday. Curve steepening is expected.

Across the Tasman, the RBA announces rates today. We expect a 25bps cut. In the week ahead, continue to look out for headlines from the Greek PSI negotiations that continue to drag out. Also look out for rate announcements from the Bank of England and ECB on Thursday.