Fixed Interest Markets by Kymberly Martin
It was an interesting day in NZ markets. A low side surprise on NZ CPI saw yields fall across the curve. The DMO auction attracted very strong demand.
It’s been a while since local data really moved markets. However, yesterday’s CPI print came in surprisingly low at -0.3 (+0.4 expected). This saw short end swaps get hammered immediately, with 2-year finding its first point of liquidity at 2.77%. It closed a touch higher at 2.78%, down 8 bps on the day.
The market now prices 5bps of RBNZ rate cuts in the year ahead. However, we would caution about reading too much into the CPI number. The softness is mainly the result of a few specific influences on the headline inflation figures, rather than genuine weakness in core inflation. Nor is it a pointer to the medium term inflation outlook. We continue to expect the RBNZ to raise rates in September, though the risks to this view are now clearly toward a later start.
The swap curve (2s-10s) steepened by 4bps to 138bps, as 10-year yields declined a more modest 4bps, to 4.16%. Near-term we expect the curve to continue to steepen. The long-end should be dragged higher by offshore longer dated yields. These should continue to edge higher with the improvement in risk appetite and solid run we are seeing in equities at present.
NZ bond yields also fell across the board. The yield on 15s closed down 10bps at 2.72%, and that on 23s down 7bps to 4.02%.
The DMO auction saw stellar demand on the face of it. An 8x bid-to-cover ratio for the 100m of 19s offered. Behind the scenes some large bids maybe made it look better than it really was. The yield on 19s closed down 7bps at 3.59%.
In response to the low CPI number, inflation-linked bonds (16s) sold off by 17bps. They are a rather illiquid instrument but clearly responded to today’s data.
Overnight, there was a generally positive tone in markets. Markets were buoyed by successful French and Spanish bonds auctions, some decent US earnings results and US data releases. US10-year yields surged higher from 1.89% to 1.98%, and German equivalent from 1.80% to 1.86%. Credit spreads narrowed as did non-core European spreads to German bonds.
For today, all appears to be well in the world. Expect NZ yields to open up and retrace some of yesterday’s fall. Further steepening is expected.
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