By Kymberly Martin
The swap curve steepened further yesterday.
2-year yields remained at 2.57% while10-year yields rose 4bps to 3.73%.
This has taken the 2s-10s curve back to 116bps. We would take profit on the steepening trade at this point, especially given the greater risk aversion seen overnight accompanied by a pull-back in US long yields.
For the short-end of the curve, the key remains tomorrow’s RBNZ meeting. We expect it to be a fairly even-handed affair.
Ongoing global risks, the strong NZD and some growth data softness will be weighed against the risks of simmering house prices and re-emerging credit growth. The market continues to price a 15% chance of a 25bps cut tomorrow which we see as highly unlikely.
The NZ DMO provided some more definitive details on its planned issuance of inflation-indexed bonds. Issued under syndication the bonds will be a Sept 2025 maturity as anticipated (to align with AU equivalents). There will be a $1 bln minimum initial issuance. The issue will price by midday today, with an expected real yield of 2.09% - 2.14%. Expected solid demand for these bonds may undermine demand for conventional long-end NZGBs at this Friday’s auction.
Overnight, the global mood soured somewhat. As a result, US and German ‘safe haven’ bonds attracted demand, with 10-year bond yields falling around 5bps to 1.76% and 1.57% respectively. Spanish-German 10-year spreads rose around 20bps to 405bps.
Today, AU CPI data will be critical for informing the market’s view of RBA policy at its Nov 6 meeting. Our NAB colleagues expect Q3 CPI to show an uptick, impacted by the implementation of the carbon tax. They see the underlying inflation rate as sufficiently contained for the RBA to remain comfortable with cutting at the next meeting.