By Kymberly Martin
NZ swap yields closed down 2-6bps on Friday with a flattening bias to the curve. 2-year swap closed well within its range of the past few months, at 2.94%.The 2-10s ended the week at 112bps.
The market prices around an 80% chance of an OCR hike by 12 months’ time. Given current RBNZ rhetoric this does not seem unreasonable to us, though formally we forecast a first 25bps hike in March 2014.
Our key point of difference with market pricing remains the trajectory of the OCR thereafter. We continue to see a steady path of hikes, taking the OCR to 4.50% by mid-2015.
We therefore continue to view dips in mid-curve swap yields as hedging opportunities.
While NZ celebrated the Queen’s birthday, offshore markets were fairly volatile. After a further 3.7% decline in the Japanese Nikkei index, European markets were initially buoyed by stronger-then-expected European PMI data. This saw ‘safe haven’ German and US 10-year bonds initially sell-off.
US 10-year yields climbed as high as 2.18% ahead of the US ISM release early this morning. However, subsequently, US 10-year yields dropped below 2.07% before returning to trade around 2.11% this morning.
Current dynamics are consistent with our view that US 10-year yields have likely now moved into a higher range (1.80%-2.25%), but still remain vulnerable to individual data points.
We do not see a rapid one-way ascent for US 10-year yields, to our end-year forecast of 2.50%. As always, the direction of US (and AU) long yields will continue to exert a dominant influence on the long-end of the NZ curve.
For now, we continue to see the NZ 2-10s swap curve contained within a 95-125bps range.
Domestically, there are mostly 2nd tier data releases this week, though look out for the release of the Crown Financial Statements today. It is a big event week offshore.
The RBA announces rates today. Our NAB colleagues see it as too early for the Bank to cut again. On Thursday, the BoE and ECB announce rates. The key data highlight of the week will be Friday’s US payrolls.
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