By Kymberly Martin
It was a fairly busy end to the week in NZ markets, with yields higher again. On Friday night US 10-year yields pushed on to close at 2.53%.
NZ 2-year swaps closed up 3bps, at 3.18%. The market remains reluctant to price much more than 100bps of OCR hikes from the RBNZ in the two years ahead.
However, all the action remained at the long-end of the curve, which followed offshore moves higher. 5-year closed up 6bps, at 3.89%, and 10-year up 8bps, at 4.49%. This is the highest that 10-year swap has traded since April last year.
The 2-10s swap curve has burst through the top of its year-to-date range, to close the week at 131bps.
Given the further rise in US long yields on Friday night, some further near-term steepening may be in the offing. However, assuming US yields find a new trading range we would be looking to position for flattening of the NZ curve in 2H.
Meanwhile NZ bonds continued their sell-off on Friday but with decreased ferocity. As a consequence, NZ swap-bond spreads narrowed. At these levels (10-year below 40bps) we would not be surprised to see some further buying of NZGBs relative to swap. The yield on NZ 10-year bonds now sits at 4.10%, its highest level since April last year.
On Friday night, an article by Fed commentator Hilsenrath in the WSJ, highlighted overlooked ‘dovish’ signals in Chairman Bernanke’s commentary. This briefly curtailed the sell-off in US bonds, however, US 10-year yields closed the week close to their highs at 2.53%.
Expect the NZ market to continue to take its cue from offshore, with long-end yields likely getting a further boost higher today.
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