Extreme volatility across all markets and global spread proxies all push wider. Today's RBNZ expectations survey may add to market obsessions

By Kymberly Martin

NZ swaps closed down 3-5 bps yesterday.

Overnight, as the global equity rout continued, US 10-year yields dipped toward 1.90%, before returning to trade at 2.04%.

Following the lead of moves offshore and significantly heightened risk aversion, NZ swap and bond yields fell across the board yesterday. NZ 2-year swap closed at 2.82%, its lowest level since May 2013. 

We continue to expect 2-year swap will trade down toward 2.70% in months ahead as the RBNZ cuts the OCR to 2.50% by its Oct meeting.

We remain fairly comfortable with this view, following the RBNZ’s speech on the NZ property market yesterday afternoon. However, the speech squarely acknowledged that low interest rates were contributing to housing demand and prices pressures, particularly in Auckland. This is one of a number of factors that prevent us getting too carried away in our expectation for OCR cuts.

Equally the Bank said that “current weakness in export prices, economic activity and CPI inflation mean that interest rate increases are likely to be off the table for some time”. Like many Central Banks globally, the RBNZ is currently walking a tight rope between low CPI and high house price inflation.

The NZ curve also flattened a little further yesterday as 10-year swap closed at new historic lows of 3.48%. With time, these levels will likely attract corporate paying activity out to the longer-end of the curve. However, there will be little rush while global ructions continue.

Overnight, in extreme volatility across all markets, US 10-year yield plunged toward 1.90% as the S&P500 index opened down 5%. However, as the equity index has grappled its way higher, so too have US yields. US 10-year now trades at 2.03%. Fed funds futures are pricing little chance of a Sept hike and just a 0.235% Fed funds rate by year-end.

Global credit spread proxies have also pushed wider on both sides of the Atlantic. The Aussie iTraxx index yesterday pushed up to 116, its highest level since October 2013. A push above these levels has historically been consistent with NZ credit spreads being marked wider.

Today, we expect the NZ curve will likely experience further flattening pressure.

Domestically the RBNZ’s inflation expectations series will be in the spotlight today. This has grown in stature in recent times. The market obsesses about the decimal point of readings, in the current low CPI environment domestically and globally. An inch higher from Q2’s 1.85% reading would be welcome, but any slippage would only encourage the market in pricing RBNZ rate cuts. Otherwise all eyes remain on Asian markets and on equity/credit markets in particular.


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

Daily swap rates

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