By Kymberly Martin
NZ swap rates nudged higher on Friday by a further 3-4bps. This saw 2-year swap close 14bps higher on the week, while 10-year closed up 18bps. The 2-10s curve closed the week at 133bps.
2-year swap closed the week at 3.36%, its highest point year-to-date, as did 5-year swap at 4.16%. We continue to target 3.60% for 2-year swap by year-end.
However, in the near-term we would not be surprised to see some receiving interest creeping back in to take advantage of the significant “carry” (7bps/months) that 2-year swaps offer.
Over the past few months the market has moved sharply to price much of our own view of the OCR in coming years.
Market pricing is now consistent with around 165bps of RBNZ hikes in the coming two years, whereas we have long held the view of 200bps of hikes over the period.
Meanwhile the sell-off in NZ bonds has not been as harsh as for swaps in recent weeks. This has seen swap-bond spreads widen notably. From around 28bps in mid-July, 10-year swap spreads now sit around 46bps. We continue to see a 30-60bps range as justified in the medium-term.
There was little momentum in market offshore, on a data-light Friday evening. Equities closed fairly flat while US 10-year yields traded down a fraction from 2.59% to 2.56%. The market likely has its eye on the greater event risk ahead, this week.
The highlights will be the release of US Q2 GDP on Wednesday night along with the US FOMC rate decision. As always, every word from Chairman Bernanke will be diced and spliced.
However, even more important than rhetoric in determining market direction (risk sentiment and US/NZ yields) will be Friday’s US payrolls report. Thursday will also bring Bank of England and ECB rate decisions.
Domestically it will be a quieter week. There are no data scheduled for release today. The focus will be Wednesday’s ANZ business survey. We expect this to continue to show businesses in very good heart.
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