Swap and NZGB yields decline across the curve as RBNZ gives a direct signal of impending "policy easing"

By Kymberly Martin

NZ swap and bond yields closed down 4-6 bps across the curve yesterday.

Overnight, US 10-year yields traded up to 1.62% before returning to 1.56%.

The RBNZ’s economic update provided the impetus for lower NZ yields across the curve. In its late-scheduled updated the Bank made very clear that monetary policy will be very firmly directed at the pursuit of getting CPI inflation back to target i.e. not distracted by housing market concerns. It made specific reference to the fact the NZ TWI sits 6% higher than its projections as of the June MPS. It specifically referenced the scenario outlined in that MPS that suggested the OCR could be cut below 1% if the NZ TWI simply failed to fall from its June level.

Yesterday’s statement’s final paragraph included; “it seems likely that further policy easing will be required”. This was a notch more direct than at the June statement. The market was prompt to ratchet up pricing of rate cuts. It now prices more than a 90% chance of an 11 August cut and around a 1.70% trough in the OCR in the year ahead. This seems a fair representation of current risks.

NZ 2-year swap closed down 6 bps, at 2.06%. We are now at levels where tactical paying opportunities may present themselves. As NZ 10-year swap closed down 4bps, the 2-10s curve remains at 42bps.

NZGB yields also declined across the curve. The NZDMO’s auction of NZD150m of NZGB2025s was well received. It attracted a 2.6x bid-to-cover ratio and the weighted average successful yields was slightly below pre-tender mid-levels. In credit, there were signs that domestic issuance is whirring back into life after its ‘Brexit’ hiatus. Auckland Council, Westpac Banking Corp and Wellington International Airport all announced deals.

Overnight, the ECB left policy unchanged as expected. However, President Draghi admitted there is a lot of uncertainty at present and is unsure how the ‘Bexit’ vote will ultimately impact the Eurozone economy. However he stressed the Bank’s “readiness, willingness, ability” to act, if necessary. This rhymes with his now famous “whatever it takes” comment of the past. Overall, his comments appeared not particularly downbeat, with some glimmers of optimism.

German yields gyrated as he commented, but ultimately ended the night close to where they started, with 10-year yields at -0.02%. Equally, US 10-year yields briefly pushed above 1.62% before returning to 1.56% currently.

There are no scheduled local data releases today so expect contained trading into the weekend.

Daily swap rates

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