NZ swap and bond yields pushed higher across the curve. Markets may take today's FSR signals as suggesting rate cuts coming

By Kymberly Martin

NZ yields pushed higher and the curve steeper yesterday.

Overnight, US yields again traded a wide range, now sitting at 2.26%.

Following the previous night’s offshore moves, and in the absence of domestic data releases, NZ swap and bond yields pushed higher across the curve yesterday. Most pressure was felt at the long-end of the curve, as short-end yields remain capped by the market’s expectations for RBNZ rate cuts.

The market continues to price around 40 bps of RBNZ rate cuts for the year ahead.

NZ 10-year swap closed up 8 bps at 3.97% while 2-year closed up 2 bps at 3.41%.  Similar moves were seen in NZ bonds. The yield on NZGB 2027s closed up 9 bps, at 3.62%.

Overnight, heightened volatility in the US Treasury market continued. We suspect this will remain a feature of the market in coming months as we approach the first Fed rate hike in almost seven years. We anticipate a first hike in September.

Overnight, US Fed member Williams said the Fed could decide to raise rates at any meeting, and he was in “wait and see” mode, watching the data. He said he saw the safer course for rates as being very gradual increases, but starting a bit earlier.

US 10-year yields along with their German counterparts pushed sharply higher late last evening.US yields briefly broke above 2.36%. Subsequently they have fallen back to trade at 2.26%. These 10bp+ intra-night moves are becoming increasingly common.

This morning it will be all eyes on the release of the RBNZ’s six-monthly Financial Stability Report. We will be looking to see how the Bank is progressing toward broad measures to regulate housing “investor” loans.

There has also been speculation the Bank might have something to say about tools to curb the Auckland housing market’s enthusiasm specifically.

Talk of such tools may well encourage the market to think this opens up greater prospect of RBNZ rate cuts.

From an analytical perspective, we would find it odd for a Central Bank to express concerns for a rampant housing market and then promptly follow with rate cuts that would help drive mortgage rates ever lower.

—————————

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

Daily swap rates

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