NZ swap yields rise strongly, bond yields more so. Markets less convinced the OCR will be reduced again. German rates drift lower while US rates keep rising

By Kymberly Martin

NZ swap and bond curves steepened yesterday as yields closed up 5-10 bps.

Overnight, US 10-year yields pushed on to above 2.37%, before returning to 2.35%.

Yesterday’s domestic rate moves were entirely prompted by Friday’s strong US payrolls report and associated sell-off in US Treasuries. The sell-off in NZGBs was slightly larger than the move in swaps, resulting in narrower swap-bond spreads. Still, spreads remain at the bottom of established ranges, and have not yet broken sharply lower as seen in US and AU counterparts.

The yield on NZGB 2027 bonds closed up 11 bps, at 3.48%, its highest level since mid-July.

NZ 2-year swap closed at 2.82%, toward the upper-end of its relatively tight range since Sept. The market now prices a trough in the OCR at 2.47% by mid next year and just a 30% chance of a 25 bps cut by year-end. Our core view remains that the RBNZ will cut the OCR to a cyclical trough of 2.50% by year-end.

Overnight, US and German 10-year yields traded in opposite directions. German yields drifted a little lower against the backdrop of slightly higher US yields. This has taken US-German 10-year spreads up to 168 bps, their highest level since mid-May.

As the Fed eventually starts its hiking process but the ECB maintains/expands its policy easing, this spread could well push wider (it peaked around 190 bps early this year). However, we do not see it as infinitely elastic. Rather, we see low European yields providing a brake on the sell-off in US Treasuries.


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

Daily swap rates

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