By Kymberly Martin

NZ swap yields closed down 2-4bps with the 2s-10s curve a little flatter at 106bps. Heading into today’s NZ Q4 CPI release the market now prices around a 25% chance of a 25bps RBNZ cut by mid next year.

Today, in line with consensus we expect inflation to tick up to within the RBNZ’s 1-3% target band, with a 1.2%y/y reading. However, the risks are tilted to the downside.

If data comes on the low-side, the recent pull-back in swap yields, within well-established ranges, will likely continue.

Receiving interest in the mid-curve on the back of two chunky Kauri deals also saw 5-year swap yields close down 4bps, at 3.21%, yesterday. This is still at the upper-end of ranges we would expect to hold for much of H1.

DMO bond auctions resumed yesterday. The bid-to-cover ratio was fairly modest at 2.6x for the 2017s and 2.0x for 2023s.

More notable was the wide range of successful bids for the 2023s. At 3.48-3.59% there was a 7bps tail relative to the average successful yield.

This suggests it will be difficult to sustain bond demand in coming weeks at current relatively depressed yields. We expect NZ bond yields to rise relative to swap and AU counterparts.

Overnight, markets were slightly more buoyant. US housing starts data jolted US 10-year bond yields higher to trade around 1.88% currently. A weaker-than-expected US Phili Fed survey later on was not sufficient to dampen the mood. German 10-year bond yields rose from 1.54-1.61%. Reduced demand for the European ‘safe haven’ bond was also driven by a successful auction of €4.5 Spanish sovereign bonds.

The moves offshore overnight should put upward pressure on the long-end of the NZ curve. A low-side CPI reading could see downward pressure at the short-end, so a steepening bias could prevail on the curve today.