Negative risk sentiment pushes benchmark bond rates lower. Aussie weakness may weigh on NZ

By Kymberly Martin

NZ swaps closed down 1-2 bps across the curve.

Overnight, US 10-year yields fell from 2.26% to 2.20%.

NZ yields pushed lower on the open yesterday, following offshore moves. However, paying activity later in the day meant that swaps closed down just 1-2 bps across the curve. NZ 2 and 5-year swap sit at 3.85% and 4.08% respectively.

We continue to see NZ short-end yields being fairly tightly range-bound through H1 2015.

We have lowered the level at which we would receive 2-year swap, to 3.95%, given our NAB colleagues now see the RBA cutting rates in Q1 next year. If delivered, this would also weigh on NZ sentiment, limiting any push higher in NZ yields.

Our core view remains the RBNZ completes its rate hiking cycle from Dec next year, though the risks remain tilted toward delay.

We suspect at tomorrow morning’s meeting the RBNZ will maintain a subtle tightening bias, but likely flatten its projected 90-day bank bill track. Recall, when last published in September this implied a 4.50% OCR by late 2016. We see a 4.25% peak OCR.

In a night characterised by falling equity markets and generally negative risk sentiment, US ‘safe haven’ Treasuries were in demand. 10-year yields fell from 2.26% to 2.20%.

As Greek bond yields surged, German 10-year bond yields slid to new historic lows, at 0.68%.

Expect this negative sentiment to result in lower NZ yields at the open today.

At the same time it will be all eyes on the Fonterra announcement expected at 8.30am today.