Yellen targets slow and steady rate rises in the US. Slumping dairy prices here encourage markets to expect more rate cuts

By Kymberly Martin

NZ swaps closed down 1-3 bps yesterday.

Overnight, US 10-year yields traded as high as 2.43% before returning to sit at 2.35% currently.

It was a relatively quiet day in domestic interest rate markets in the absence of domestic data releases. NZ 2-year swap closed at 2.99%, as the market prices around 56bps of rate cuts from the RBNZ in the year ahead. The 2-10s swap curve has flattened a fraction, to 89 bps.

Yesterday saw a solid LGFA (Local Government Funding Agency) tender. All three maturities on offer (2020, 20201 and 2027) attracted good demand. We see long-dated LGFA-NZGB spreads as fairly attractive at present. We look for further compression over the medium-term, toward 50 bps (from circa 70 bps currently) as offshore participation continues to grow steadily.

Overnight, US 10-year yields briefly spiked toward 2.43% as solid US data coincided with comments from US Chair Yellen. She said rate rises at some point this year are likely appropriate. She made clear that if the Fed waits longer it could mean it ultimately might need to raise rates more rapidly. This is a scenario it would rather avoid, in a bid to keep the rate hiking process slow and steady. US 10-year yields have subsequently drifted lower over the course of the morning to trade at 2.35%.

Another soft GDT dairy auction in the early hours of this morning (-10.7%) will only serve to encourage market expectations for RBNZ rate cuts this morning, ahead of the release of NZ Q2 CPI. Although the reading will likely confirm that Q1 was the trough in the annual rate of inflation, at 0.1%, it will hardly look worrying (we pick 0.4%y/y). Given current market sentiment, it would likely show a much bigger reaction to a low-side reading than a slightly higher than expected number, given we are still well short of the RBNZ’s 2% inflation target.

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

Daily swap rates

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