By Kymberly Martin
NZ swap and bond yields closed down another 1-3bps yesterday. Short-end swap yields are still within familiar ranges, with 2-year closing at 2.65%.
However, after the NZ close the RBA cut its cash rate by 25bps (66% priced by the market). The statement was sufficient for the market to extrapolate a little to this side of the Tasman.
Expect lower short-end NZ swap yields today. In the case of the RBNZ however, we believe their hurdle level for cutting rates remains high. We continue to look for opportunities to pay 2-year swap below 2.60%, where more than 25bps of RBNZ cuts are priced.
There was resilient receiving interest at the long end of the NZ swap curve yesterday, taking the 2s-10s curve back to 96bps. We expect to see the curve bounce from here. This will be very dependent on moves in US 10-year yields.
These appear to be finding support at the 1.60% level. NZ-US 10-year bond spreads are also close to the bottom end of ranges, at 1.82%. This suggests any bounce in US yields will be expressed at the long end of the NZ curve.
Today, we have the seventh LGFA tender. There will be a total of $275m bonds on offer, across two maturities, 2017 and 2019. We expect solid demand at tender. Demand should be supported by a lack of corporate issuance in the NZ market, and continued search for pick-up over NZGB yields that sit close to historic lows.
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