The NZ curve steepened a little further yesterday.
Overnight US 10-year yields traded between 2.19% and 2.28%. German equivalents traded up from 0.60 to 0.72%.
The RBNZ’s Financial Stability Report was the highlight yesterday morning. Of the three key risks the document highlighted (Auckland housing, dairy sector debt and the market’s reach for yield), the first gained the most attention.
New tools will be implemented 1 October that are essentially a tweaking of the existing LVR framework. Housing “investors” in the broader Auckland region will need to have at least a 30% deposit. Owner occupiers in Auckland remain subject to the exiting LVR “speed limit” of 10% i.e. at most, 10% of a bank’s lending can be to those with less than a 20% deposit. Everyone outside Auckland – investors and owner-occupiers alike – will have “speed limits” increased from the present 10% to 15%.
toi Short-end yields initially tried to fall on the announcement but soon returned to previous levels.
The initial response was presumably triggered by the following logic; if the RBNZ can address housing market concerns with these new tools, it will open the door for OCR cuts to address low CPI inflation. We find this logic flawed.
The Bank stated that low interest rates are contributing to two of its three key risks. i.e. to swelling house prices and to the market chasing riskier assets in the search for yield. To us, it would seem inconsistent to then follow up these statements with near-term OCR cuts..
We continue to see the market’s pricing of an almost 50% chance of an OCR cut by June, as too aggressive. We believe if the Bank were to cut it will be in response to further disappointing data (inflation expectations, dairy prices etc.) that would take some time to reveal itself.
NZ 2-year swap closed little changed, at 3.41%, while 10-year closed up 3bps, at 4.00%. The yield on NZGB27s also closed higher, at 3.67%.
The main test for NZGBs today will be the DMO’s auction of NZ$300m of NZGB27s. This will be watched closely after last week’s auction of inflation indexed bonds where the DMO rejected all bids.
Overnight, it was interesting to see that US 10-year bonds could not sustain a rally after the disappointing retail sales data. Yields briefly gapped lower to intra-night lows around 2.19%, but have subsequently returned to trade at 2.29%.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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Short-end yields initially tried to fall on the announcement but soon returned to previous levels.
The initial response was presumably triggered by the following logic; if the RBNZ can address housing market concerns with these new tools, it will open the door for OCR cuts to address low CPI inflation. We find this logic flawed.
It would seem that successful bidding participants at the NZDMO TBill tender on Tuesday got shortchanged because of the overexuberant response to ANZ cheerleading the OCR down. Thankfully, the taxpayers are the winners.
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