NZ 5-year swap breaks below 3.2% with markets betting on more OCR cuts. NZGB demand very strong pushing yields lower

By Kymberly Martin

NZ swaps closed down 2-4 bps on Friday and there was a strong rally in NZ bonds following the previous night’s offshore moves.

On Friday night, US 10-year yields traded between 2.26% to 2.28%.

NZ yields slumped on Friday following the previous night’s decline in US yields and commodity prices.

Notably, NZ 5-year swap broke below 3.20%. From a technical perspective, the 2012 lows around the 3.00% level now appear to beckon. Meanwhile 2-year swap ended the week at 2.88% as the market prices that the OCR will be cut to around 2.55% by April next year. Our central case remains the OCR will be cut to 2.50% by Oct this year.

On Friday afternoon the DMO’s tender of NZ$200m of NZGB2020s attracted very strong demand. The average successful bid yield for the bonds (2.73%) was below where the bonds traded pre-tender. In addition, the auction attracted a 5.3x bid-to-cover ratio.

On Friday night, US yields dabbled sideways as Eurozone and US PMI data came in marginally either side of expectations. However, they dipped a little into the close following softer than expected US home sales data. US 10-year yields ended the week at 2.26%, at the lower end of the 2.20-2.50% range we see containing yields in the near-term.

It is a quiet start to the week domestically, with not too much on the local agenda until Wednesday’s published speech by RBNZ’s Wheeler.

—————————

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

Daily swap rates

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