Traders accept NZ swap rate 'collapse' was overdone, given the RBNZ's core inflation data had a 'mild lift'

By Jason Wong

US Treasuries sold off on Friday night as the risk-on sentiment prevailed, but that move has been retraced as equities have sold off again.

All things considered, the range over the last couple of sessions hasn’t been particularly wide.

After reaching a high of 2.09% on Friday, the 10-year rate currently trades at 2.03%, down 2 bps on the day.

Fed fund futures are little changed, with just 26 bps of tightening priced in by the end of the year. The FOMC’s rate decision released on Thursday morning NZ time isn’t expected to be overly revealing about policy intentions. The committee will likely want to keep its options open about a possible March tightening, although the market sees little chance of any follow-through on that view.

The local rates market was quiet on Friday and yesterday, with Wellington on holiday. At 2.65%, the 2-year swap rate has given up most of the post-CPI collapse, when it reached a low of 2.56%. 

Traders accept that the move was overdone, particularly in light of the release of the RBNZ’s preferred core measure, which showed a mild lift in core inflation, against the big fall in the headline rate. The bank could well highlight this inflation differential with its OCR release on Thursday. No market analysts expect a cut to the OCR, but the easing bias must surely prevail.