By Kymberly Martin
NZ swaps closed down 1-3bps yesterday, with the curve slightly flatter. However the 2s-10s curve has steepened from its lows around 94bps to 102bps currently.
This has been driven by better pay-side interest at the long-end, given the curve had flattened well beyond what ‘fundamentals’ would dictate at this point of the cycle.
2-year swaps closed at 2.62%, well within their current tight range. The market currently prices 90% chance of a 25bps RBNZ cut in the coming 6 months.
Cuts are not our central view, though this pricing is understandable as ‘insurance’ against global risks. We would look to pay 2-year swap at the bottom of the current range, around 2.55%.
NZ bond yields were unchanged yesterday. The DMO has announced $100m of 19s and $150m of 23s for its auction today. Demand at auction has not been stellar of late, and yields sit not far off all-time lows.
Therefore we expect the auction today will see interest from those trying to pick up bonds in the ‘tail’. i.e. at above average successful yield. This could put additional upward pressure on the long-end of the NZ curve.
Overnight, equity markets were a little softer and US 10-year yields slumped in the early hours of this morning to 1.68%.
Today, the NZ PMI will be released along with the ANZ consumer confidence index. We’ll be looking to see if the PMI can improve from its poor showing in August. Across the Tasman the key release will be employment data.
Tonight, Italy returns to markets to auction bonds, which will be a good barometer of current appetite for sovereign risk.
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