Hedging activity from SME's is likely to limit any downside moves in swap rates

By Kymberly Martin

It was a fairly quiet start to the week in NZ markets. NZ swaps and bonds closed up 1-2bps.

There was reluctance for NZ short-end swaps to move lower, with payers still seen in 2 and 3-year. We are still seeing steady flow from the mortgage book and small and medium-sized businesses interested in hedging.

This trend will likely limit any dips in swap yields from here.

For now, 2-year swap sits at 3.05%, close to its February highs. 5-year closed at 3.66%, at its highs for the year. The 2-10s swap curve remains at 115bps.

The yield on NZ 10-year bonds closed at 3.73%, now almost 60bps off its early May lows.

Along with Thursday’s DMO auction of $120m of nominal NZGBs, this Wednesday will bring the latest LGFA auction.

The offering is of $15m of LGFA17s and $270m of $LGFA21s. In combination this is a significant amount of issuance to be absorbed in fairly heavy market conditions for bonds.

We would not be surprised to see a reduction in bid-to-cover ratios for the tenders, and/or long tails in the bidding.

There was a positive tone in equity markets overnight, following on from the 2.7%rebound in the Japanese Nikkei yesterday.

US 10-year bond yields broadly consolidated around the 2.14% level, though showed a bit of volatility around the release of US data.

Today, the RBA will release the Minutes of its June meeting. However, it will likely simply confirm that future moves remains dependent on data delivery in coming weeks/months. The market currently prices a further 40bps of rate cuts from the RBA in the year ahead.

Tonight the German ZEW survey of economic sentiment will be released. US CPI data is also due. It will likely confirm that current US inflation is contained and not an impediment to the US Fed maintaining stimulative policy while the labour market heals.