Long end rates feel the pressure, led by softer UST 10yr weakness. Overnight data saw a brief boost in yields but key rates have now drifted lower

By Kymberly Martin

Yesterday, NZ yields followed Friday’s decline in offshore yields, with most pressure felt at the long-end of the curve.

Overnight, US 10-year yields traded a full 10 bps range, now sitting just above 2.39%.

The short-end remains the more stable part of the NZ curve at present, held in place by expectations that the RBNZ is now on hold for a while. NZ 2-year swap closed down 3 bps yesterday at 2.27%.

The market prices that the RBNZ will raise the OCR from its current level of 1.75%, to 2.0%, by March 2018. This is not far from our own view, and we therefore see NZ 2-year swap as close to ‘fair value’. However, we continue to see a 2.15-2.35% range as probable in the months ahead, partly driven by direction in offshore yields over this time.

At the long-end of the NZ swap curve, yields declined 6 bps yesterday. NZ 10-year swap closed at 3.34%. It now appears to have been consolidating since mid-November, following the abrupt global-led surge higher in early-November. The overnight moves have taken the NZ 2-10s swap spread back to 107 bps. Over the medium-term we continue to look for a move up to 125 bps, though a near-term pullback would not be surprising.

The resignation of NZ PM Key was met with little response from the rates market. Rating agency Moody’s confirmed there were no implications for its Aaa rating of the NZ sovereign.

The widely expected “No” vote from the Italian constitutional referendum, resulted in the resignation of PM Renzi, but little enduring impact on markets. Italian-German 10-year bond spreads briefly spiked higher last evening, but soon returned to trade only a little higher than Friday’s close, at 165 bps.

US 10-year yields were on the ascendancy from mid-evening. They gained a last little boost, to pop their head above 2.44%, after the release of a stronger than expected US non-manufacturing ISM print. However, they have subsequently drifted lower to now trade at 2.39%.

Today the RBA will meet. The market does not seem very focused on this meeting as global events have dominated sentiment recently. Our NAB colleagues believe the RBA’s new Governor seems relaxed with the cash rate at its current level of 1.5%. There is no sense of needing to cut again anytime soon, especially as house prices have reaccelerated in some areas.

Kymberly Martin is on the BNZ Research team. All its research is available here.