By Kymberley Martin
NZ swaps pushed higher by 5-10bps across the curve, following yesterday’s RBNZ meeting.
Overnight, US 10-year yields declined to 2.59%.
The RBNZ stuck firmly to its guns yesterday.
It remained committed to the process of ‘normalising’ the OCR. Its published 90-day bank bill track was almost identical to the March MPS, still suggesting an OCR at 5% by late 2016.
There was also no hint of a pause at the next RBNZ meeting.
We continue to look for a further 25bps hike in July before a pause during the election process.
The RBNZ repeated its mantra that the NZD at current levels was “unsustainable”. However, notable by its absence was any direct reference to adjusting the OCR track due to moves in the currency.
The market was clearly taken by surprise that the RBNZ did not soften its previous stance.
NZ swaps jumped higher. From 4.03%, NZ 2-year swap closed at 4.13%. This is above the 4.10% level that had marked the previous highs year to date. 5-year also pushed higher by 8bps to close at 4.55%. The 2-10s curve flattened 5bps to 79bps.
Meanwhile the sell-off in NZGBs was more muted. The yield on NZGB23s rose just 3bps to 4.45%.
This saw swap-bond spreads notably wider on the day.
NZ-AU spreads pushed higher, as a disappointing AU labour market report, kept a cap on AU yields. NZ-AU 2-year swap spreads broke out of long-held ranges to sit at 130bps this morning. We continue to expect this spread to peak around 150bps by year-end.
Overnight, US 10-year yields dipped on the back of softer than expected May US retail sales data. (0.3%m/m vs. 0.6% expected). In addition, an auction of 30-year US bonds attracted the highest demand in more than a year. From around 2.65%, US 10-year yields have slipped to 2.59%.
Today, the BNZ Manufacturing PMI will be released along with NZ food prices. The Bank of Japan is set to meet today, although consensus expects no major changes to policy.
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