Fixed Interest Markets by Kymberly Martin

It was a relatively quiet day in NZ markets. Swap yields closed virtually unchanged while bond yields rose 5bps. This narrowed swap-bond spreads.

NZ bonds sold off across the curve, leaving yields around 5bps higher at the end of day. The yield on 21s, at 3.91% is around 13bps higher than the Australian equivalent. It is 205bps higher than the US equivalent. NZ 10-year swap bonds spreads (EFP) has narrowed to around 29bps. These two factors should ensure that today’s relatively small DMO auction (100m of 19s) sees passable demand. However, the limited size of the tender does suggest the DMO is responding to recent weaker demand at tender.

Overnight, US and German 10-year yields remained fairly range-bound around 1.86% and 1.79% respectively. Peripheral European spreads narrowed to German bonds a little. The market responded optimistically to the story that the IMF planned to expand its resources by $500b. Italian 10-year bond yields fell 8bps to 6.42%.

Today, we get the ANZ consumer confidence data for NZ. Importantly we get CPI data for Q4. The CPI report is expected by the market to show a quarterly outturn of 0.4% (We are a touch lower than this at 0.3%). This would drop annual CPI inflation to 2.6%, from 4.6%, mainly reflecting the GST spike dropping out of the computation.

Still, this is enough to keep the RBNZ from being entirely complacent on inflation. This is especially true given 2-year inflation expectations remain stubbornly at 2.8%.