Market pricing in further 75 bps cut by RBA this year

by Kymberly Martin

NZ swap and bond yields dipped back 5-7bps yesterday. Overnight, US 10-year yields jumped after an upside surprise on the US ISM Manufacturing release.

The yield on NZ 2-year swaps closed back down at 2.73%. The market continues to price around 5bps of rate cuts from the RBNZ in the year ahead.

These expectations may come under further downward pressure today, given the surprise 50bps cut by the RBA at the end of our day yesterday. The 2s-10s curve remains steady at 138bps.

The market now prices a further 75bps of rate cuts from the RBA this year. AU 2-year swap yields fell 15bps on the announcement yesterday.

NZ bond yields also dipped around 6-7bps, with the yield on NZGB23s closing at 3.94%, and that on 17s at 3.25%. Today we get the 3rd LGFA (Local Government Funding Agency) auction. A modest 20m of 15s and 120m of 17s is offered.

Assuming successful allocations this will take the total LGFA bonds in issuance to just over 700m. Given the current paltry yields on NZGBs (largely reflecting low global yields), LGFA bonds offer an attractive pick up in yield without significant greater risk. e.g. LGFA17s still trade around 106bps over NZGB equivalents. Demand should therefore be solid at today’s tender.

Overnight, US 10-year yields gapped higher from 1.90% after the release of a stronger-than-expected Manufacturing ISM. This confirms this sector of the US economy remains firmly in expansion. US 10-year yields now trade around 1.96%.

Tonight, Spain returns to the market to sell bonds. This will be a good barometer of current sentiment toward European risk. Expect some steepening in the NZ curve today, as short-end yields remain under pressure given the RBA move yesterday, but the long end takes its cue from the rise in US long yields overnight.