2-10 swap curve expected to steepen as NZ cuts rates and US raises theirs

By Kymberly Martin

NZ swaps closed flat to down 2 bps on Friday.

On Friday night, US 10-year yields tracked between 2.33% and 2.37%.

NZ 2-year swap ended the week at 2.86%, at its lowest level since May 2013.

The market now prices an OCR that will be cut to around 2.54% by April next year. We see the OCR being cut back to the cyclical trough of 2.50%, by October this year. If the market moves forward when it sees the trough in the OCR it should see 2-year swap push lower toward 2.70%.

This Thursday’s RBNZ OCR review will be crucial in influencing market pricing.

Although we see a small probability of a 50 bps cut this week, we suspect the RBNZ will stick to delivering 25 bps. The Bank will not provide a published 90-day bank bill track at this meeting. However, the market will be keen to see if the words “We expect further easing may be appropriate”, remain in the statement. We suspect they will.

On Friday night, US 10-year yields briefly spiked higher, above 2.37%, as stronger-than-expected housing starts data were released. However, the move proved short lived as the market absorbed concurrent CPI data. This showed core CPI only in line with expectation, at 1.8%y/y, while real av. weekly earnings were also shown rising 1.8%y/y (from 2.2% previously). US 10-year yields slipped back to end the week just below 2.35%.

We continue to see a 2.20-2.50% range for US 10-year yields near-term. But we ultimately expect a break to the top-side as the US Fed begins to raise rates before year-end.

We see US 10-year yields approaching 2.75% by year-end, which should help further steepening of the NZ 2-10s curve.

The NZ 2-10s swap curve ended last week at 91 bps. We look for steepening over the medium term within a 75-125 bps range.

—————————

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

Daily swap rates

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