By Kymberly Martin
It was another fairly lethargic day in NZ and offshore markets.
NZ markets continue to price almost 10bps of RBNZ rate cuts by year end. This equates to the market taking out some ‘insurance’ against the possibility of a substantial RBNZ cut if the global backdrop were to deteriorate significantly. As a central case, we do not expect cuts.
Yesterday’s RBNZ 2-year-ahead inflations expectations data slipped from 2.4% to 2.3%. This is a continued move in the right direction, but still not low enough for RBNZ complacency.
2-year swap closed mid-range at 2.76% and the 2s-10s curve has slipped fractionally to 118bps.
Today is the 6th Local Government Funding Agency (LGFA) tender. A modest $75m of LGFA 19s is offered. Despite relatively tepid demand at recent government bond auctions we expect demand today should be solid.
LGFA 19s still offer more than 90bps over equivalent NZGBs or around 70bps over swap.
It was fairly quiet overnight also. US 10-year bonds replicated their previous night’s pattern. They initially sold off, finding buying support when yields touched above 1.85%. Yields are now back at the familiar 1.81% level.
In the eerie calm that currently prevails over Europe, German 10-year bond yields crept higher to 1.56%. Spanish-German 10-year bond spreads have fallen to the lowest levels since May, at 465bps.
Expect another fairly quiet day in NZ markets today with no local data releases. Tonight, US bonds may gain some direction from MBA mortgage applications data.
Also, early tomorrow morning the market will scour the latest US FOMC minutes for any shift in sentiment toward further quantitative easing.
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