By Kymberly Martin
Short-end swaps were virtually unchanged yesterday. The 2s-10s curve flattened slightly to 100bps.
However, we continue to expect the curve will be biased to steepen.
Next Tuesday’s NZ Q3 CPI release may create opportunities to pay at the short-end of the NZ curve. The market looks for a 1% outcome and we formally have a 0.9% forecast.
Thereafter we see inflation picking up to a 1.6%y/y rate in Q4, before continuing to build.
The market may however, extrapolate a low-side outcome to a continued downward trajectory in inflation, and thereby increase expectations of RBNZ rate cuts. Look to pay 2-year swap at 2.55%.
Yesterday’s DMO auction attracted passable demand with a 2.4x bid-to-cover ratio. We expect that off-shore demand for NZ bonds remains solid, in the context of the low yield environment globally.
Today, we get the September update of non-resident holdings of NZ government securities. The previous release showed that close to 62% of bonds are held by non-residents.
Sentiment managed to hold up overnight. Eurozone equities posted positive returns. Despite rating agency S&P’s downgrade of Spain’s sovereign rating to BBB-, one notch above ‘junk’, Spanish spreads remained relatively contained overnight. Italy managed to auction its assigned bonds without problem, with decent bid-to-cover ratios.
Having opened higher, German ‘safe haven’ 10-year bonds sold-off to 1.50%.US equivalents traded as high as 1.73% before returning to 1.67% early this morning.
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