Over the festive/New Year season a significant decline in NZ yields has occurred across the curve, partly driven by offshore forces.
On Friday night, however, US Treasuries led a rebound in offshore yields, following the release of the US employment report.
Since late-2016 highs near 2.57%, NZ 2-year swap has declined notably. After a dip toward 2.36% on Friday it closed for the week at 2.40%.A US-led decline in offshore yields has been instrumental in the move. The market now prices a first RBNZ rate hike by November this year. This is a fair representation of current risks.
During the thinner New-Year trading conditions, NZ 10-year swap also declined. From above 3.60% in late-2016, it closed last week at 3.42%.We suspect there will be corporate payers on the lookout for these type of dips as long-term hedging opportunities.
Overall, moves in recent weeks have taken the NZ 2-10s swap curve back to 101 bps, from above 120 bps in mid-December. We see the probability of renewed steepening in the months ahead, but expect a flattening curve later in the year as the start of the RBNZ hiking cycle approaches.
NZGBs have outperformed swap in recent weeks. i.e. swap-bond spreads have widened. Generic NZ 10-year bond yields have declined almost 30 bps since late-2016. Although taking their lead from offshore moves, NZGBs have outperformed both US and AU equivalents. As the global sell-off in bonds lost momentum, attention likely returned to the yield pick-up that NZGBs provide. In addition, any New Year allocation into NZGBs comes against an absence of supply, via NZDMO tenders, until 19-January. NZ 10-year bond yields closed last week at 3.18%.
However, we suspect NZ yields will gain a boost today, and the curve will steepen, following moves offshore early on Saturday morning. US yields gapped higher after the release of the US December employment report. Payrolls were slightly below consensus expectation, but more importantly, average hourly earnings rose 2.9%y/y. This is their highest growth rate since June-2009. This level of wage growth puts upward pressure on the Fed’s rate hiking path.
US yields gapped abruptly higher across the curve. From 1.16%, US 2-year yields quickly traded up to 1.21%. The US OIS market now prices around 56 bps of Fed hikes this year. US 10-year yields popped from 2.34% to close the week at 2.42%. This is well below the mid-December highs of 2.64%, but the bounce curtails the relentless decline in yields that subsequently occurred.