Clear signals from the US Fed that policy rates will rise mid 2015 sees wholesale markets bid up benchmark rates. NZ swaps follow

By Kymberly Martin

NZ swaps closed up 3 bps across the curve yesterday.

Overnight, US 10-year yields pushed up from 2.12% to 2.21%.

Yesterday morning’s US FOMC meeting initially inspired some severe volatility in US rates markets. The initial statement came across as relatively dovish as it stated the Fed could afford to be “patient” in raising rates. Furthermore, it stated this was consistent with its previous “considerable time” phrase.

Yields fell.

However, in the subsequent press conference Chairperson Yellen did not mince her words. She said it was unlikely the Fed would raise rates in the “next couple” of meetings.

Further, she clarified that “a couple” did indeed mean “two”. This suggests, as the Fed currently sees things, it could be raising rates anytime from the April 29 meeting next year.

This is somewhat ahead of where the market was pricing the first hike. i.e. Q3. Yields then pushed higher, a move that has continued last night.

US 2 and 10-year bond yields now trade at 0.63% and 2.21% respectively.

We remain comfortable with our view the US Fed will raise rates from mid next year. We also continue to see the Fed funds rate reaching a cyclical peak of 3.75% by end 2017.

NZ swap and bond yields pushed higher across the curve yesterday. NZ 2 and 10-yer swap closed at 3.81% and 4.21% respectively.

We continue to see the bias for the NZ curve to steepen in 2015 as we approach Fed rate hikes, while the RBNZ is on hold.

Today, NZ net migration data and the ANZ business confidence survey will be released. Both have been recent areas of strength that the RBNZ has noted, but unless they are accompanied by inflationary pressures the market is unlikely to get excited about the OCR rising any time soon.