By Kymberly Martin
It was a very quiet day in NZ markets. Yields closed down 1-2bps across the curve.
NZ 2-year swap closed at 2.91%. The market continues to price around an 80% chance of a 25bps hike from the RBNZ in the year ahead. Our central case remains for a first hike in March 2014.
We continue to believe the market under-estimates the pace of gradual OCR hikes that will then unfold. We see the OCR peaking around 4.50% in 2015.
We therefore continue to see attractive hedging opportunities in the 3-5-year part of the swap curve. That said, we do not see a catalyst to drive yields higher in the immediate-term.
Rather, a period of consolidation/drift lower in yield is possible ahead of the next RBNZ meeting on June 13.
The 2s-10s swap curve sits a little flatter at 109bps this morning. We continue to see the well-established 95-125bps range holding for much of the year ahead.
Overnight, markets were extremely quiet in the backdrop of UK and US public holidays. There was a relatively buoyant tone in European markets however, with the Euro Stoxx50 closing up 1.1% and German 10-year bond yields rising from 1.42%-1.46%.
Today, there are no scheduled domestic data releases.
Tonight, Italy will sell bonds as a good barometer of current demand for ‘peripheral’ European sovereign risk. Italian-German bonds spreads remain close to their lows since mid-2011, a sign of reduced fear of Italian default.
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