Bonds
BNZ experiencing increased action in fixed rate mortgage book
21st Mar 12, 8:11am
by
by Mike Jones
Bond yields inched a little higher yesterday. Swap yields closed little changed, disguising some notable intra-day moves. US yields continue to try and push higher.
NZ swap yields were up by as much as 5-7 bps yesterday, led by the persistent bid in the back end of the curve. The move was in sympathy with US 10-year bond yields approaching their 2.40% high, last seen in October 2011.
However, into the close we saw some good interest to receive the short-to-mid curve.2-year swaps traded as high as 3.18% on the day, before coming back to close at 3.12%, down 2bps.
It looks as though a few short positions in 2-year are taking profit around these levels, hence the struggle to head too much higher.
We reiterate that we see 2-year at 3.20% as not far from “fair value”. This is based on our view of a first OCR hike in December, and gradual moves thereafter to be around 3.75% in early 2014.
We have seen a notable pickup in interest this week from businesses and the mortgage book in fixing. This follows a lack-lustre week after the RBNZ’s MPS. We will be watching to see whether this increased amount of retail fixing continues.
NZ bond yields closed up around 3bps across the curve. The market looks to be positioning itself ahead of the LGFA auction today. The LGFA is undertaking its second round of issuance, with $85m 15s and $180m of 17s offered. This will take the total amount of LGFA bonds in issuance to $565m.
Overnight, US 10-year bond yields continue attempting to move higher, currently trading around 2.38%. This leaves NZ-US 10-year spreads comfortably close to the bottom of their range, around 190bps.
In this respect, we see further upside to NZ long bond yields. However, a key driver of NZ markets today will be this afternoon’s LGFA tender. We expect demand to be solid. Since the inaugural issue, in mid-February, spreads to equivalent Government bonds have narrowed by around 4-7bps.
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