Daily swap rates

These are start-of-day swap rates tracked and reported by a major bank.

An interest rate swap is where two people (or counterparties if you want to be technical) agree to exchange two different types of interest rate for a specified period of time.

The amounts of interest exchanged is calculated by multiplying a defined amount (known as the notional principal) by either a fixed interest rate or an interest rate defined by an index on a particular day. An example of an index is the 3 month NZ$ BKBM, which is a fancy way of saying 3 month bank bills.

The charts refer to standard NZ$ fixed/floating interest rate swaps where one person pays a fixed rate (the rate in the chart) every 6 months – this is the fixed leg of the swap - and the other pays 3 month bills every 3 months – this is the floating leg of the swap.

The market standard “notional principal” is NZ$ 20 million and the length of swaps go from 1 to 10 years, with 3 to 5 being the most common.  The notional principal is called “notional” because it is never exchanged.

NZ$ interest rate swap rates are determined by the rates on NZ government bonds and the demand for paying or receiving the fixed rate.  A gauge of the level of demand is the difference between the NZ government bond rate and the swap rate, known as the "swap spread".

The major influences on the level of demand are ...
- corporate borrowers, who have floating rate borrowings;
- banks, who also want to match fixed rate mortgages against their floating rate borrowing; and
- issuers of fixed rate NZ$ bonds, who typically want to pay the fixed rate.

However, because the New Zealand economy is really just "a housing market with a few other bits tacked on", the biggest influence on New Zealand swap rates usually comes from banks working to manage their mortgage rate risk.