Markets move to price in an OCR cut in 2015, although BNZ see this as unlikely. German 10yr bonds now yield 0.36%

By Kymberly Martin

NZ swaps closed up 2-3 bps on Friday. 

On Friday night, US 10-year yields dipped back down to 1.80%.

NZ 2-year swap closed up 3 bps at 3.66%. The market still prices almost a 40% chance of an RBNZ cut in the year ahead.

This pricing will wax and wane with incoming domestic data points and offshore events.

However, we expect the market will likely move to fully price at least one 25 bps cut on the back of soft inflation data. However, we do not believe the RBNZ will ultimately deliver a cut, as it focuses on a still strong economy and the medium-term inflation outlook.

NZ 10-year swaps closed up 3 bps, at 3.79%, taking the 2-10s curve to 13 bps. We see the curve as biased to steepen back toward 40 bps.

On Friday night, despite generally stronger-than-expected data in Europe and the US, German yields declined as the market contemplated the prospect of ECB buying. With Germany scheduled to run fiscal surpluses, and bonds set to be bought under the newly announced QE program, the market is likely mulling the prospect of bund scarcity.

The yield on German 10-year bonds dropped to a new historic low of 36 bps. US equivalents slipped from 1.86% to 1.80%.

Today the NZ PSI and credit card billings will be released, while AU celebrates Australia Day. Tonight the German IFO business survey will be released.