Government needs to raise $270 mln per week for each of the next 13 weeks

by Kymberley Martin

It was another fairly quiet day of consolidation in NZ markets. Offshore “safe haven” yields drifted lower overnight.

NZ swap yields again closed little changed yesterday. 2-year swap yields closed comfortably near the middle of their recent range, at 3.08%. The 2s-10s curve is finding support around the 150bps level. The market now prices just over one 25bps rate hike from the RBNZ in the year ahead. We expect two 25bps moves in the period.

The DMO will announce its bond tender today. To meet its funding requirements for the remainder of the fiscal year it needs to average around $270m of weekly issuance. Given current quiet markets, demand for that level of issuance if not abundantly apparent, though recent auctions have been fairly well supported.

Overnight, US yields that had been drifting lower fell further after the weaker-than-expected Richmond Fed Manufacturing index. US 10-year yields traded down from 2.26% to 2.19% currently. They have now eased almost 20bps from their mid-March highs, though are still up around 20bps since the start of the month.

German equivalents subsided from 1.95% to 1.89%. Since mid-March when our risk appetite indicator peaked at 72% (now 68%) spreads of some non-core European bonds, to “safe haven” German bonds have started to tick up again. For example, Italian-German 10-year spreads have risen from 278bps to 318bps over the period.

In the absence of NZ data releases today expect NZ yields to take their cue from offshore developments. Expect yields to open under downward pressure, particularly at the long-end.