NZ bond yield curve almost horizontal; NZ govt stock maturing in 2023 yielding below cash

By Kymberly Martin

The relentless decline in NZ long-end yields continued yesterday. Overnight, US 10-year yields pushed up from 1.87% to 1.92%.

Following the previous night’s decline in the global oil price and offshore yields, longer-dated NZ yields declined from the open. 10-year swaps closed down a chunky 9bps, at 3.90%.

This is now only 15bps above the level they traded at in May 2013, just prior to their surge higher when the US Fed initially indicated it intended to wind down its QE programme.

Meanwhile short-end yields remain fairly sticky. 2-year swap sits at the bottom of its range at 3.77%, reluctant for now to price in OCR cuts.

We do not expect OCR cuts and expect the hurdle for such is very high. However, we would not be surprised to see the market veer toward pricing this outcome as NZ CPI readings dip in the next couple of releases.

NZ bonds yields have also fallen sharply. The entire curve is now almost horizontal. The yield on NZGB23s is now below cash (at 3.48%) while NZGB27s trade at just 3.55%.

LGFA (Local Government Funding Agency) spreads have also crunched in as investors scrabble to find yield pick-up as NZGB yields have collapsed.

Overnight, in slightly more buoyant markets, as the S&P500 Q4 earnings reporting season get underway, US yields pushed a little higher. From intra-night lows below 1.87%, US 10-year now trades at 1.92%.

Tonight, US Dec retails sales data will be the main data focus, while the US Fed will also release its Beige Book on the economy.