by Kymberly Martin
Yesterday’s RBNZ statement was more dovish than its predecessor. Inflation was considered to be “restrained”. Domestic recovery is given its full due, but global concerns once again become more prominent.
On the global front it was considered, “near-term indicators have moderated and financial market sentiment is still fragile”.
In the statement, the currency extends its time in the spotlight. This time the message is more overt. Continued strength in the NZD could lead the RBNZ to flatten its proposed rate trajectory, or even cut rates.
The market reaction was quite muted at first but then gained momentum. Receiving interest (local and offshore) saw swap yields close down 6-8bps at the short-end and 2-3bps at the long-end. The 2s-10s curve steepened in the process to 138bps.
The market now prices around 6bps of RBNZ rate cuts in the year ahead and a 20% chance of a cut at the next meeting. We maintain our expectation for a first 25bps rate hike in December. However, we see little immediate catalyst to reverse sentiment. 2-year swap yields that currently trade at 2.76% have their next key support level around 2.70%.
While for now, this may be the path of least resistance we do not see yields breaking their late 2011 lows. We therefore see the current pull back in yields as a renewed opportunity to hedge against future interest rate rises.
Bond yields also closed down 5-6bps across the curve. The DMO auction was announced at a substantial $900m, distributed equally between NZGB17s, 19s and 23s.
Despite the recent rally in NZ bonds, demand today should be supported by the continued spread of NZ bond yields to offshore equivalents. NZ-US 10-year spreads sit at 210bps and NZ-AU equivalents at 34bps. We expect both spreads to narrow further in the near term.
Overnight, German 10-year bond yields fell back to 1.68% after slightly weaker-than-expected Eurozone confidence readings. US 10-year yields drifted down to as low as 1.93% after higher-than-expected US weekly jobless claims data. They returned to trade around 1.96% currently, after stronger-than-expected US pending home sales.
Today, the Bank of Japan announces interest rates and the market will be looking for suggestions of further quantitative easing.
Tonight, Italy returns to markets to sell bonds as a good barometer of current market sentiment toward Eurozone sovereign risk.
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