By Kymberly Martin
The NZ swap curve steepened further yesterday. Short-end yields moved very little as the market continues to price around a 20% chance of a RBNZ rate hike in the year ahead.
However, longer yields followed their offshore counterparts higher. The 2-10s curve has steepened further to 109bps.
NZ bond yields closed up another 3-7bps, with a steepening bias to the curve. We continue to see NZ long-end bonds as expensive in outright terms, and relative to swap, offshore counterparts and equities. We expect the sell-off in NZGBs can continue.
The LGFA (Local Government Funding Agency) has announced its tender details for this Wednesday. It will auction $10m of LGFA17s, $15mof LGFA19s and $215m of its new LGFA21 bond.
While LGFA spreads to NZGBs have narrowed in recent weeks, we expect demand at auction should be solid, as seen in previous events.
Yesterday, Japanese Government bonds were also making headlines. The yield on 10-year bonds, that sat at 0.60% just two days ago (off lows close to 40bps in early April), touched as high as 0.80% yesterday afternoon.
If the Bank of Japan’s policies to stimulate inflation in the economy are successful, yields would be expected to rise a lot higher.
Alternatively, if the market loses faith in the Government’s ability to service its already large, and expanding debt obligations, yields could also rise sharply.
Overnight, in the backdrop of slightly better-than-expected US retail sales data, US 10-year yields briefly touched 1.94%, before returning to trade at 1.92%.
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