Expectations high Fed will extend asset purchasing program

By Kymberly Martin

There was once again little action in NZ markets yesterday. Yields at the short-end closed little changed. Around a 50% chance of a 25bps RBNZ rate cut in the year ahead is still priced.

The 2s-10s swap curve has flattened further, to 102bps, and is now approaching levels (95bps) that we would reposition for steepening.

Overnight, German and US ‘safe haven’ 10-year bonds sold off after a surprisingly strong German ZEW survey. German and US 10-year bond yields have risen to 1.32% and 1.65% respectively.

Still, US yields remain not far from the bottom of their 1.55%-190% range traded for the past 4 months.

A key test to this range will come with the US FOMC meeting early tomorrow morning. Expectations are already high that the Fed will announce an extension of its asset purchases program.

Any comments with respect to recent labour market improvements (the Fed’s key focus) could see 10-year yields heading back toward the top of their range.

Today, there are no local data releases to drive markets. However, given the sell-off in long-bonds seen offshore, expect some steepening pressure at the long-end of the NZ curve today.

The last LGFA tender for the year will also take place this afternoon. A total of $75m of 2017 and 2019 bonds are on offer. As seen in previous auctions we expect demand will be strong, especially as new issuance of NZ corporate bonds remains muted.