By Kymberly Martin
On Friday, NZ swap yields followed their offshore counterparts lower. The curve flattened as long-end yields fell most aggressively.
The 2s-10s curve now sits back at 108bps, mid the 95-125bps range that has contained it for the past 10 months.
2-year swap closed the week at 2.86%, at a similar level to where it started. The market prices around a 40% chance of an OCR hike in the year ahead. We expect a first hike in March 2014.
On Friday night, US non-farm payrolls came in well below expectation (88k vs. 190k). US 10-year yields gapped lower on the release from 1.75% to 1.68%, before crawling back to close the week at 1.71%.
Yields are now at their lowest levels since late December, before they surged higher on euphoria the US ‘fiscal cliff’ had been navigated at the last moment.
These late Friday moves suggest further flattening pressure on the NZ curve today.
Despite developments offshore, this week’s local data is likely to confirm the domestic economy remains fairly solid in the face of the widespread drought.
This should be the message from tomorrow’s Quarterly Survey of Business Opinion and from Thursday’s BNZ PMI. This should help underpin OCR expectations and by implication the short-end of the NZ curve.
NZ 2017-2023 government bonds closed down 5-7bps on Friday. This takes yields closer to the bottom of ranges of the past year and back toward all-time lows.
Supply issues appear to be a key driver of the market at present, approaching the $NZ2b syndication of the new NZGB2020 bond.
The LGFA (local government funding authority) will be coming to market with supply this week. Its 11th tender will take place on Wednesday, with details released today.
Demand should be solid as seen in previous auctions where bid-to-cover ratios have averaged 4.2x.
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