Markets calmer resulting in a better credit mood and less pressure on credit spreads. Eyes on Janet Yellen

By Kymberly Martin

NZ swaps closed up 2-3 bps across the curve yesterday.

Overnight, as risk appetite improved, US 10-year yields traded up from 2.18% to 2.30%.

The stronger than expected AU employment report proved the main influence on local short-end yields yesterday. AU 3-year swap traded up from 2.13% to 2.22% following the report.

The market now prices slightly less than one 25 bps cut from the RBA in the year ahead.

NZ swaps followed their cue. NZ 2-year swap closed up 3 bps, at 2.96%. The market prices that the RBNZ will cut the cash rate to around 2.67% next year, from its current level of 3.25%. That is a fair representation of current risks.

Overnight, market sentiment took succour from the rebound in Chinese equities and commodity prices, and the absence of inflammatory headlines from the Greek crisis.

As Eurozone equities rebounded, German 10-year yields traded up from 0.67% to 0.72%. US equivalents traded from 2.18% up to 2.30%. Expect this to apply steepening pressure to the NZ curve today. We continue to see the NZ 2-10s swap curve steepening within a 75-115 bps range through to year-end.

Overnight, measures of default risk, such as European iTraxx indices, compressed as the general mood improved. This will help to limit any immediate upward pressure on NZ credit spreads.

We believe NZ LGFA-NZGB spreads are currently offering attractive value to those who can stomach global credit risk. From above 70 bps currently, we expect long-dated LGFA-NZGB spreads to compress toward 50 bps over the medium-term. The next test of demand for LGFA bonds will come at next Wednesday’s tender.

Otherwise there is not too much on the local agenda to drive markets into weekend.

However look out for tonight’s speech by US Fed Chair Yellen, for where current thinking on the start of the Fed hiking process lies. Currently Fed fund futures price just a 0.26% Fed funds rate by year-end.

—————————

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

Daily swap rates

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