By Kymberly Martin
Swap yields were a little higher and curves flatter yesterday. Overnight, US markets reopened, with US 10-year yields closing down at 1.70%.
Swap yields closed up 2-4bps. The market now prices around a 65% chance of a rate cut by mid next year.
Our central case remains the RBNZ will not cut, instead remaining on hold for a prolonged period (at least until Dec 2013).
However, there is a risk next week’s NZ labour data provide some disappointment, which would prompt the market to ramp up its expectations of rate cuts.
For the rest of this week there is no local data to challenge OCR expectations, so expect short-end yields to consolidate mid-range.
NZ bond yields closed little changed yesterday. The tender today has been announced at $100m of NZGB19s and $150m of NZGB23s.
As the US market re-opened after the storms, bonds initially sold off before finding demand to take yields back down to 1.70%. Yields remain around mid-range. A range that we believe will be marked by higher lows and higher highs going forward.
We see 10-year yields creeping up to 2.0% by Q1 next year. In the immediate future it is tonight’s US ISM and tomorrow’s US payroll numbers that have the greatest potential to impact on US yields.
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