Strong GDP numbers gives RBNZ leeway to absorb negative impacts of drought into forecasts

By Kymberly Martin

NZ swap yields moved higher across the curve after the stronger-than expected Q4 GDP release.

The result provides the RBNZ with much more leeway now to absorb any negative impacts of the current drought into its GDP forecasts for 2013, without materially affecting its overall view of the level of activity.

NZ 2-year swap closed up 6bps, at 2.94%. Overall, we see a path of higher lows, and higher highs for NZ swaps in the year ahead.

Current levels on 2-year (15bps below mid-Feb highs) should be assessed as a hedging opportunity, given that we see 2-year trading up to 3.40% by year-end.

The 2-10s curve closed the day at 122bps after 10-year yields closed up 9bps.

Yesterday’s DMO auction of $NZ200m of bonds was well received. There was an average bid-to-cover ratio of 4x, and the range of successful bids was tight. However, overall bond yields still closed up 6bps across the curve, following the moves seen in swaps.

Overnight, ‘safe haven’ German and US bonds were in demand after weaker-than-expected EU PMI data. German and US 10-year yields slipped from 1.39% to 1.36%, and from 1.96% to 1.93% respectively.

However, peripheral European spreads were relatively well behaved despite unresolved Cyprus issues. In fact, Spain managed to auction €4.51b of bonds, exceeding its maximum target. The 2-year tranche was sold at 2.27%, down from 2.54% last month.

Domestic data today (ANZ job ads, net migration) is unlikely to ruffle local markets. Tonight, a key driver of global sentiment will be the March German IFO business survey.

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