by Kymberly Martin
NZ yields closed little changed yesterday, though this disguised some intraday volatility. Today, the Local Government Funding Agency (LGFA) will hold its inaugural bond auction.
NZ 2-year swap yields continue to linger close to the top or recent ranges at 2.88%. The market continues to price just under 10bps of rate hikes from the RBNZ in the year ahead. We expect 75bps.In the past week the 2s-10s swap curve has steepened notably from just over 130bps to 144bps currently. We expect further gentle steepening, before a prolonged flattening ensues from H2.
NZ bond yields closed little changed, but the yield on 21s rose to 3.99% intraday, before closing at 3.96%. NZ long yields have moved markedly higher relative to their AU and US counterparts in recent days. NZ-AU and NZ-US 10-year spreads now trade at around 4bps and 200bps respectively.
Today, the NZ LGFA will hold its inaugural bond auction at 2pm, for 50m of Apr 2015s and 250m of Dec 2017s. We expect demand to be solid, given lack of issuance in the local authority space in the lead up to this initiation. However, interest will focus on the pricing of these instruments relative to credits and NZ Government bonds. The NZ DMO will also hold its normal bond auction on Thursday.
Overnight, “safe haven” US and German 10-year yields drifted lower. They currently yield 1.94% and 1.91% respectively.
This occurred after US retail sales disappointed in the headline number (even though weakness was concentrated in autos). Elsewhere in Europe, bonds licked their wounds after the previous day’s downgrades of 6 European sovereigns by rating agency Moody’s. This included placing the UK’s AAA rating on negative watch. UK 10-year bonds yields have drifted lower to 2.09%.
However, Italy managed to auction €6b of debt at much lower yields than at previous auctions, helping to underpin sentiment in Europe.
In the day ahead we will get NZ Q4 retail sales data, where our expectation is slightly above the markets, at 1.0%. The LGFA tender will also be closely watched.
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