Investors provided additional tool to protect capital against inflation with issuance of inflation-indexed bonds from October

By Kymberly Martin

Given the moves seen offshore on Friday night, NZ yields opened under downward pressure as expected. Overnight, markets consolidated.

NZ swap yields closed down 4-7bps yesterday. 2-year swap yields declined a little to 2.67%, still very much mid-range. The curve flattened a little as 10-year swap yields fell 7bps, to 3.75%.

A flattening bias was also apparent in bond markets. NZGB15s declined 4bps to 2.55% while NZGB23s slipped 6bps to 3.57%.

The NZ DMO announced yesterday that it has appointed a syndicate to assist with the issuance of inflation-indexed bonds.  Such issuance has been much discussed over the years but came more clearly into view in the 2012 Budget announcement.

Issues will start after 1 October 2012 and will likely have a maturity of 20 September 2025.These instruments will broaden the government funding avenues and provide investors with a hedge against inflation. Once a liquid market is established, they may also prove a good indicator of inflation expectations.

Overnight, US and German ‘safe haven’ bonds sold off somewhat. But there seems a lack conviction in the run up to the US Fed meeting and tomorrow night’s vote by the German constitutional court. Non-core European bond yields appear to be consolidating at their new lower ‘post OMT’ levels.

NZ yields may find some support today given the relative stability overnight. Locally today, we get card spending data and another housing indicator with the QV house price index.

Still, more broadly, market focus will remain firmly on Thursday’s RBNZ meeting. We suspect it should provide a fairly balanced statement designed not to unduly ruffle current market pricing for the OCR (-15bps over 12 months).