NZ swaps pushed lower by international trends; Greek yields surge higher, with contagion to Italy. Eyes on AU unemployment report

By Kymberly Martin

NZ swaps closed down 2 bps across the curve.

Overnight, US 10-year yields drifted down from 2.22% to 2.20%.

NZ swaps were lower from the open yesterday, assisted by the downshift in offshore yields the previous night and Fonterra’s announcement yesterday morning. NZ 2 and 5-year swap closed at 3.82% and 4.06% respectively ahead of today’s RBNZ’s meeting (9am NZT).

To reiterate, we suspect at this 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.

However, the market already prices an OCR that is only around 3.90% by this time. We therefore do not expect a sharp dip in NZ short-end yields on any downshift in the 90-day track, assuming the RBNZ’s tightening bias is maintained.

Overnight, Greek bond yields continued to surge higher as political concerns brew. There is also some mild contagion to the likes of Italian bonds, triggering uneasy memories of the depths of the Eurozone sovereign crisis. By contrast, ‘safe haven’ German bond yields continue to hover close to historic lows, around 0.68%.

It is now all eyes on the RBNZ and its Monetary Policy Statement which will show a full set of updated forecasts.

Following that, attention will move across the Tasman for the release of the AU employment report (1.30pm NZT). The market currently prices 33 bps of rate cuts from the RBA by Q3 next year. Our NAB colleagues now see 50 bps of cuts by this time.