Overseas investors keen receivers of NZ rates at a time when mortgage and local corporate paying flows are light

By Jason Wong

NZ rates were lower across the curve yesterday, reflecting the rally in US Treasuries on Friday.

The 10-year government bond yield fell 4.5 bps to 3.27%, to reach the lowest level since the end of October. This yield has fallen in the order of 30 bps this year, a decent rally over a two week period.

The swap market has shown a similar movement, with 10-year swap at 3.48%, just one bp off its all-time low when it briefly spiked down in August.

Downward pressure on rates at the short end of the curve remains, as the probability of easier monetary policy in NZ increases.

Overseas investors appear to be keen receivers of NZ rates, at a time when mortgage and corporate paying flows are light. The 2-year swap rate fell by 4 bps to 2.70, taking it back to the level prevailing before the RBNZ’s “hawkish” easing in December.

The OIS market now prices in a full 25 bp easing this year, with the timing more or less around the September meeting. The justification for this would be that the RBNZ’s tolerance for a deflationary shock is pretty low, with inflation travelling well below the bank’s mid-point target.

The tumble in oil prices looks likely to be sustained and if this is correct then it could well feed into lower core inflation as well. The counter argument would be that lower oil prices, being largely supply driven, are acting as a tax cut and will stimulate domestic demand, offsetting any potential deflationary pressure. We shall see.

CPI data due tomorrow and the OCR review next week are key events to watch.