NZ yields push higher with 40% chance of rate cut by mid next year priced in

By Kymberly Martin

NZ swap yields pushed up another 2-4bps yesterday. The market now assigns around a 40% chance of an RBNZ cut by mid next year. 2-year swaps, at 2.75%, are now moving toward the upper end of their trading range for the past 6 months.

The 2s-10s curve has moved down to 100bps, approaching levels we would look to position for steepening.

Yesterday’s LGFA tender once again attracted strong demand with an average 4.4x bid-to-cover ratio.

We suspect we will continue to see strong demand in 2013. This will be underpinned by a continued lack of alternative corporate bond issuance.

Global participation in the bonds should also increase as liquidity improves, and credibility of the organization is established.

US10-year yields responded to the Fed Statement with some volatility but yields are little changed at 1.67%. The NZ market will digest this announcement as the morning progresses, and Bernanke undertakes his press conference.

Today the BNZ PMI will be released. Tonight, Italy and Spain both return to markets to sell bonds.

This will be a good test of current market appetite for peripheral European risk. Italian-German spreads have narrowed following the spike that occurred post P.M Monti’s resignation announcement.