By Kymberly Martin
It was a fairly muted day in NZ swaps ahead of today’s RBNZ meeting. The curve flattened a couple of bps to 114bps.
We continue to expect today’s meeting 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. We expect no change in rates, though the market still prices a small (15%) chance of a cut.
The DMO completed its inaugural issue of its Sept 2025 inflation-indexed bond issuance yesterday. The DMO issued $2.5b (above early indications of targets) at a real yield of 1.96%. Demand was strong with a book size in excess of $4b.
Further issuance of IIBs will occur under tender from Feb 2013. It will be interesting to see if this strong demand has any impact on demand at the conventional bond auction on Friday.
Yesterday’s AU CPI release showed annual inflation a little higher than expected, due to revisions to previous quarters. Still quarterly, underlying inflation came in at 0.7%, not far from the RBA’s quarterly forecast of around 0.75%. The data should therefore not be sufficient to prevent the RBA cutting a further 25bps in November, according to our NAB colleagues.
Last evening, ‘safe haven’ bonds were in demand, after the soft European data, until later in the night when US homes sales data surprised to the upside. Overall, US 10-year bond yields managed to trade in a fairly tight 3bps range trading around 1.77% currently.
In its final meeting ahead of the US presidential election the US Fed provided little to surprise markets. Reiterating many former statements it repeated that interest rates are likely to stay near zero “at least through mid-2015”.
It stated the economy is still growing modestly, unemployment remains elevated and strains in financial markets still pose significant downside risk. As expected there was little response in markets.
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