Why are NZ swap spreads so wide?
New Zealand swap spreads have moved sharply high over the past month. The 3-year swap spread is close to 50bps, its highest level since 2015, while the 10-year swap spread is close to its highest level since 2019, just under 30bps. NZ hasn’t been unique in seeing swap spread widening, with similar moves seen offshore (see Chart 2). In this note, we address the NZ-specific drivers affecting swap spreads at the short end and the longer end of the curve.
Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.
Updated NZ rates views after the sell-off
NZ short-end rates have had a massive move higher this month. The 2-year swap rate increased 28.25bps on Monday, after the big upside surprise to CPI, its biggest one day increase since December 1997, when the RBNZ was still operating its ill-fated MCI framework. Moreover, Monday’s sell-off followed a 19bps increase last week. 1y1y swap traded above 2.50% yesterday. It has since retraced slightly, to around 2.45%, still its highest level since mid-2018.
Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.
Outlook for Borrowers: Post-October MPR
The RBNZ raised the OCR by 25bps, to 0.5%, at the MPR yesterday. This was the RBNZ’s first interest rate hike since 2014. The OCR hike had been well-flagged in previous RBNZ communications, including in interviews by Governor Orr and his deputies after the August MPS, and it was universally expected by economists and priced by the market.
NZGBs Likely To Be Included In The WGBI In Late 2022
The World Government Bond Index (WGBI) is the primary global government bond benchmark for offshore investors. NZGBs have historically not met the WGBI’s eligibility criteria based on (the lack of) market size. NZGBs are already included in the Bloomberg Barclays Global Aggregate index which is the main benchmark for the broader global fixed income market, including investment-grade corporate and agency bonds and securitised assets.
Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.