By Kymberly Martin
In the wake of the FOMC surprise yesterday, NZ yields closed down 9-12bps.
NZ 2-year swap closed down 9bps at 3.47% and 5-year down 11bps at 4.45%. The markets response to the inline Q2 GDP outcome (+0.2%q/q) was fairly muted as offshore moves dominated the NZ market yesterday.
NZ bond yields also declined 9-12 bps across the curve. Despite renewed interest in bonds in the wake of the FOMC announcement, demand at yesterday’s DMO tender was still pretty tepid. The bid-to cover ratio was a passable 2x but the range of successful bids was 7bps wide and above market rates at the time.
This could be reflective of demand for NZGB 2020 bonds specifically. The supply of this maturity is prolific at present, as the DMO builds its latest line. But it could also reflect continued reluctance to add to NZGB positions. However, the next nominal bond tender is not for another month. Assuming some consolidation in US yields, we should start to see some improvement in demand for NZGBs.
Overnight, benchmark US 10-year yields moved off their lows below 2.68% to sit at 2.74% currently. The move was assisted by upside surprises on US existing home sales data and the Philadelphia Fed Survey.
More broadly we see US 10-year yields in a 2.50%-3.00% range in the months ahead.
The Fed’s reluctance to begin its ‘tapering’ process, may mean near-term yields spend more time in the lower portion of this range as opposed to testing the upper limit.
Today should be a fairly uneventful day globally with only 2nd tier data to be delivered, though yields may attempt to claw back some of yesterday’s losses. Tonight, the US focus will be on speeches by Fed members George, and Kocherlakota.
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