Offshore sentiment dictating local wholesale interest rates with longer rates falling while short rates stay steady

By Kymberly Martin

Another day and further flattening of the NZ curve.

Overnight, US 10-year yields pushed back up toward 2%.

While the short-end of the NZ curve remains steady (2-year swap unchanged at 3.80%), the long-end has continued to follow offshore counterparts lower.

NZ 10-year swap fell a further 5 bps yesterday to close at 3.96%. The entire swap curve is now incredibly flat with just 43 bps between 20-year and 1-year swap.

The NZ bond curve has also flattened dramatically. While NZGB17s now trade below cash, at 3.47%, the yield on NZGB27s is only 16 bps higher at 3.63%.

The moves are being entirely dictated by offshore sentiment, and that is where we will need to look for any change in direction of yields. The best that offshore yields have managed overnight is some consolidation. But this did occur in the backdrop of generally disappointing Eurozone data delivery. German and US 10-year yields now trade a little off their lows at 0.48% and 1.98% respectively.

Meanwhile yields on Greek bonds continue to surge higher in the lead up to national elections later this month. 10-year yields trade at 10.5% this morning, up from 7.1% a month ago. Still, this is well short of the 34% that yields reached in early 2012 when a ‘Grexit’ appeared imminent.

This morning (8am) the US Fed will release the Minutes from its Dec 16-17 meeting. Markets and oil prices have moved a long way since then, so any comments therein may be taken with a pinch of salt.

Tonight, EU retail sales and confidence indicators will be released. The Bank of England will meet but no changes to policy are expected. The market now prices little chance of any action from the BoE until 2016.