BNZ not expecting NZ Govt Stock issuance to be ramped up given historically low yields

By Kymberly Martin

It was a quiet day in NZ markets on Budget day.

There was little response yesterday in swap markets to the release of the ‘zero’ Budget. Yields closed little changed with the 2-year at 2.39% and the 2s-10s curve at 137bps.

The market continues to price around 50bps of RBNZ rate cuts by year end. We do not expect cuts.

Bond yields closed up around 3bps across the curve. The DMO announced its tender of 100m of NZGB19s and 100m of NZGB23s for today.

It will be interesting to see the state of demand given outright yields remain close to historic lows, but spreads to AU equivalents are still relatively attractive. For example, NZ-AU 10-year bond yields spreads remain at 37bps.

The Budget showed some tweaks to the DMO’s future borrowing program through 2016. The programme allows for a $1.5b increase in issuance in 2011/2012 if demand increases before fiscal year end (unlikely in our view given current low yields).

An additional $1.5b of issuance in 2012/2013 is provided for. Offsetting this, the programme anticipates a $4b reduction in Treasury bills over the forecast period.

Essentially this would result in a lengthening of the maturity of borrowing, as opposed to increased borrowing per se from that previously indicated.

The program also allows for the inclusion of $2b of inflation-indexed bonds in the coming two years.

Overnight, there was relative stability in “safe haven” US and German bonds. 10-year yields remain around 1.76% and 1.39% respectively. There was a slight narrowing in peripheral European bond spreads.

Spanish-German 10-year yields spreads narrowed from 482bps to 477bps.

There are no local data releases today, and little on the data front globally until the US University of Michigan Confidence survey release tonight.