MONEY MARKETS-Japan extends funding, NZ forward swaps rise

* Rally in risky assets pushes up NZ forward swaps

* Carry in NZ swaps more attractive, but a risky trade

* Japan extends funding for banks, short rates could fall

By Vidya Ranganathan

SINGAPORE, July 15 (Reuters) - This week's rally in equities and risky assets has caused forward markets in New Zealand and Australia to price in much higher rates in 2010, widening spreads between those and the still-anchored short end rates.

The Bank of Japan meanwhile voted to extend its corporate funding support measures, which include its buying of commercial paper from banks, for three months beyond their planned expiry, and it kept interest rates on hold as expected.

Analysts said the move in New Zealand and Australian swaps also had to do with an improvement in economic data, such as the vital housing and immigration numbers in New Zealand, which had led markets to price in more aggressive monetary tightening ahead.

Yet, market participants looking to receive that spread and play on what appeared to be overpriced monetary tightening were in a fix. The U.S. earnings season has just begun this week, and if Goldman Sachs's 33 percent jump in earnings was any indication of the trend in the financial sector, the rally in risky assets would run much further.

On Wednesday, the one-year New Zealand interest rate swap starting after one year was quoted at 4.64 percent, 164 basis points above the spot one-year swap .

That spread has widened 14 bps in a day and is nearing this year's peak of 190, after which it could test a historically wide 210 bps hit in 1999.

"We're going through an uptick in risk sentiment at the moment and I can see the 2-year go higher still," said Imre Speizer, a markets strategist at Westpac Bank.

Those looking to receive the forward starting swap should wait for the 2-year swap, which drives these forward swaps, to settle between 3.9 and 4 percent, Speizer advised. The 2-year swap was at 3.79 percent.

"Normally when you get to the bottom of the easing cycle you will see the difference between the 2-year and the cash rate at its most extreme.

"If you think the central bank might hike interest rates sooner than the middle of 2010, then you will price in a much higher 2-year rate. That is what they are doing."

The Reserve Bank of New Zealand has committed to retaining its easy policy until the latter part of 2010.

RBNZ Governor Alan Bollard on Tuesday said he expected the New Zealand economy to emerge from recession earlier than other countries, that monetary easing had been sufficient and that the economy needed a weaker currency.

Yet, the market has been pricing in the first rises in the 2.5 percent policy rate to occur by March 2010.

Likewise in Australia, the spread between one-year forward starting one-year swap and the one-year swap has widened by 12 bps this week to 134 bps.

JAPAN EXTENDS SUPPORT

Analysts reacting to the Bank of Japan's announcement said it might be extending corporate funding support to cover the year end, when funding needs are much higher.

"The fact that it hasn't extended the measures for six months to cover the fiscal year-end suggests that the BOJ thinks the corporate funding situation is not deteriorating," said Kenro Kawano, interest rate strategist at Credit Suisse.

"Depending on the situation three months from now, it may consider ending the measures."

The fear that these measures might end in September had halted a downtrend in interbank yen rates , where the 3-month rate has been stuck around 0.56 percent since July when the maturity of such loans crossed into September.

Rates have inched up gradually this week in Asia's dollar funding markets. In Singapore, 3-month dollars were quoted at 0.51429 percent, coming off record lows of 0.50286 on Monday.

The spread between LIBOR and overnight-indexed swaps (OIS), the latter a measure of market expectation of policy rates, was also a shade wider at 32 basis points, widening from levels of tightness last seen in early 2008. (Editing by Tomasz Janowski)