NZ swap and bond yields closed flat to down 2 bps on Friday.
US 10-year yields closed for the week at 2.27%.
It was a quiet end to the week in the NZ market. NZ 2-year swap closed down 2 bps, at 2.78%. This is close to where we calculate current ‘fair value’, based on our view the RBNZ will cut the OCR to 2.50% at its Dec meeting and leave it at this level throughout 2016. However, we continue to see 2-year swap trading within a 2.65-2.90% range in coming months, as it responds to local data and offshore developments.
Key influences on the NZ short-end this week may be today’s Q3 retail sales data and Wednesday morning’s GDT dairy auction. We expect the former to show a good lift, confirming that the mediocre Q2 result was simply a pause for breath. This could help firm-up the short-end. However, Wednesday’s dairy auction is shaping up to be pretty weak, which may cause the short-end to price in greater probability of a near-term RBNZ cut. Currently the market only prices around a 40% chance of cut at the RBNZ’s 10 Dec meeting.
Data released on Friday showed that non-resident holdings of NZGBs ticked up to 68.8%, from 68.7% the previous month. This is well above average. There appears to remain solid offshore demand for NZGBs, despite increased global market volatility and a downward trend in the NZD.
On Friday night, US yields traded lower across the curve after the release of a disappointing US retail sales report. US 10-year yields were already drifting lower into the close, when the news of Paris terror attacks hit. From early evening highs above 2.31%, US 10-year yields closed for the week below 2.27%. The market still prices around a 65% chance of a Fed hike at its Dec meeting.
On Wednesday night, the US FOMC’s Oct Minutes will be released, which may influence the market’s expectations for the timing of a first Fed rate hike.
In the meantime, the weekend’s events in Paris will likely dominate headlines, keeping a solid ‘safe haven’ bid for the likes of US Treasuries. However, US 10-year Treasuries will likely face resistance as yields approach 2.20%.