NZ swaps spike as investors bet against RBNZ's interest rate outlook

Investors will also be keeping a close eye on the Reserve Bank of Australia's rate decision on Tuesday for any hint of hawkishness.

New Zealand's swap rates have jumped to multi-month highs on speculation the Reserve Bank will have to lift the official cash rate earlier than its official projections to keep pace with central banks around the world that are talking up the prospects of rate hikes.

Global bond yields have risen sharply in the face of hawkish comments from European Central Bank president Mario Draghi, Bank of England governor Mark Carney and the Bank of Canada's Stephen Poloz, with the yield on 10-year US Treasuries hitting a 1-1/2-month high of 2.32 percent on Monday, according to Reuters. In New Zealand, the 10-year swap rate has climbed 28 basis points since June 27 to reach 3.40 percent while two-year swaps have risen 16 basis points since June 28 to 2.36 percent.

"Global forces are the dominant force at present" but investors are increasingly confident the Reserve Bank will follow most other central banks in raising interest rates, said ​Bank of New Zealand senior market strategist Jason Wong.

"No-one believes the RBNZ will hold off until late 2019," he said. "The world is broadly in sync and often is. Ignore the rest of the world at your peril. We've long thought that the RBNZ would be tightening well ahead of its guidance."

Reserve Bank governor Graeme Wheeler held rates steady at a record low 1.75 percent earlier this month and has signalled its first rate hike won't come until September 2019. Economists, however, are forecasting it will move to lift rates in 2018.

Warren Potter, a portfolio manager at AMP Capital Investors, was more circumspect, saying local rates are following "quite large moves" in Europe, US and Australia, and didn't necessarily mean people are thinking New Zealand's central bank is going to change course.

"We've seen a change in tone globally and maybe people are just extrapolating that means that other central banks will eventually have to follow suit, but I think it's more just that rates have moved higher offshore and we are following suit," Potter said.

If global rates stabilise, Potter said there may be some interest at the short end "but the moves in the back end won't turn around until we actually see falls in those offshore markets."

Potter said the key factor for near-term direction will be whether the 10-year US Treasuries push through 2.4 percent and the jobs data out of the US later in the week. If the jobs data is stronger than expected and if wage data points to some inflationary pressure "that will potentially kick start a further sell-off in rates," he said. Any further comments from central bankers will add fuel to the fire.

Investors will also be keeping a close eye on the Reserve Bank of Australia's rate decision on Tuesday for any hint of hawkishness. According to Reuters, futures markets are now tipping a one-in-ten chance of a hike in rates across the Tasman by Christmas. In New Zealand, the OIS market is pricing in the first RBNZ rate hike by May 2018, a few months earlier than previously seen but still later than Australia.