Safe haven demand trumps yield as 'fear index' spikes. Eyes on Spencer speech on NZ property markets

By Kymberly Martin

NZ swaps closed down 1-4 bps across the curve on Friday. US 10-year yields closed for the week at 2.04%.

On Friday, NZ 2-year swap was quite well anchored and failed to break below the lower-end of its range of the past couple of months. It closed the week at 2.85%.

The market continues to look for the RBNZ to cut the OCR to around 2.53% by April next year. Our central case remains the RBNZ will cut rates to 2.50% over the course of its next two meetings.

Meanwhile, longer-dated swaps pushed lower, following offshore moves. NZ 10-year swap closed down 4 bps, at 3.53%, its lowest level since Oct 2012.

The 2-10s curve pushed down to 68 bps, below the lower–end of our expected trading range of the next few months. We would now be inclined to stand aside until the direction of US long yields becomes clearer. This, rather than our expectation for RBNZ rate cuts will likely be the primary driver of the shape of the NZ curve to year-end.

In this regard, US Treasuries look to remain in demand from ‘safe haven’ flows in the backdrop of current heightened global risk aversion. On Friday night, equities tumbled, led by further declines in Chinese indices and rising tensions on the Korean Peninsula. The VIX ‘fear gauge’ spiked to its highest level since Dec 2011.

US Treasuries and German bunds were beneficiaries. US 10-year yields ended the week at 2.04%, their lowest level since early-May. The market has further ratcheted back its expectations for Fed rate hikes. Fed fund futures now price just a 0.275% Fed funds rate by year-end, from its current level around 0.13%.

Today we will be looking out for the scheduled speech from RBNZ’s Deputy Governor Spencer on the NZ property market, in a relatively quiet start to the data week. Otherwise all eyes on developments across Asia.


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

Daily swap rates

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