BNZ says based on their forecasts for the OCR to be 5% by the end of 2015, 2-year swaps should be priced closer to 4.4% rather than 4%

By Kymberly Martin

NZ swaps closed unchanged yesterday. Overnight US Treasuries showed little response to the Fed’s announcement.

The yield on NZ 2-year swap remains at 4.0% whereas we see current ‘fair value’ around 4.40%. This fair value is based on our central forecast that the OCR will reach 5.0% by end-2015.

In the near-term we expect another 25bps rate hike at the RBNZ’s next meeting on 12 June. The key risk to this view is the strength of the NZD.

The NZ TWI sits at 80.00 this morning, some 2.0% above the RBNZ’s projections for the June quarter average.

Meanwhile NZ bonds continue to appear well bid. This should help longer-dated NZGBs to outperform their offshore counterparts if US Treasuries lead a global sell-off in bonds.

The next auction of nominal NZGBs is also not scheduled for another fortnight.

Overnight, the biggest response from US Treasuries was inspired by the disappointing release of US Q1 GDP. However, the recent growth weakness was not sufficient to stop the Fed in its tracks. This morning it announced a further US$10b worth of ‘tapering’ of asset purchases. It will now purchase US$45b per month.

US 10-year yields gapped from 2.71% to 2.67% on the release of the GDP data. They have subsequently drifted down to 2.66%, showing little response to the Fed’s announcement.