By Kymberly Martin
NZ swap yields closed up 1-3bps across the curve yesterday. Overnight, US 10-year yields traded sideways around 1.75%.
The positive QSBO release yesterday helped sustain upward momentum in NZ swaps.
This had initially been instilled by relatively hawkish comments from the RBNZ’s Spencer in his prepared speech on the housing market. 2-year swap is now back at 2.90%.
The market prices a 50% chance of a 25bps rate hike by March next year.
The NZ 2s-10s curve has flattened further to 103bps. It is now approaching the bottom of the 95-125bps range we believe will hold for much of H1.
NZ bond yields also rebounded 3-4bps from recent lows. The key event for bond markets currently is the $2b syndication of the new NZGB2020 bond that is scheduled to settle on Monday.
If demand proves very strong it could result in fairly tight supply-demand conditions for NZ bonds in the weeks ahead.
For now, NZ 10-year bonds trade at 3.40%, a 166bps and 16bps spread to US and AU equivalents respectively.
Today the LGFA (local government funding authority) will auction bonds. $155m of 2019 bonds and $10m of 2015 bonds are offered.
Demand should be solid as seen in previous auctions where bid-to-cover ratios averaged 4.2x.
Overnight, in relatively orderly markets US 10-year yields traded in a 1.72-1.76% range, now sitting around 1.75%.
It is a fairly quiet local data agenda today. Only electronic card transactions are due for release. Tonight, there are plenty of US Fed speakers scheduled and the Fed’s minutes will be released tomorrow morning.
These are not expected to impact on the current view priced by US yields that the Fed is committed to highly accommodative policy for a prolonged period.
However, the near-term path of least resistance for US long yields, having rebounded from last Friday’s lows, is likely higher. This implies further near-term flattening of the NZ curve will be limited.
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