By Kymberly Martin
NZ swap yields closed down 2-4bps yesterday. NZ bonds closed down 5-6bps.
The NZ 2-10s curve has flattened a little as long-end yields have followed the retracement in US long yields. 2-year swap closed at the familiar 2.85% level, and the 2-10s curve at 108bps.
Yesterday afternoon was all about the Budget. It confirmed that a net $10b of bonds will be issued in fiscal year June 2013/2014.
This follows zero net issuance in 2013/2014 once bond maturities and a reduction of T-bills are accounted for. Hence, we reiterate our core view that real NZGB shortage is not imminent.
However, relative to forecasts published six months ago the DMO has reduced its forecasts for bond issuance in fiscal year 2014/2015 by $2b, to $8b.
The more critical issue in the year ahead will likely be the break-down between nominal and inflation-indexed bonds.
The DMO had previously outlined its desire for inflation-indexed bonds to reach up to 20% of outstanding bonds. Supporting this aim, it has announced up to $5b of 2013/2014 fiscal year issuance will be in inflation-indexed bonds.
The DMO will provide more details prior to the end of this fiscal year (June 30).In the meantime, today’s auction of $120m of nominal bonds (the first in 3 weeks) will provide a good barometer of current demand for NZGBs.
We reiterate we do not see demand (domestic, or global), dissipating any time soon.
However, we do think the sell-off in NZGBs relative to swap, and offshore counterparts may have further to run, once the market has initially digested yesterday’s Budget.
Overnight, in the backdrop of generally softer than expected US data releases equity markets remained flat. US 10-year yields pulled back from highs above 1.95% to sit at 1.87% this morning.
This will likely result in some flattening pressure on the NZ curve today. Otherwise, there is little on the data agenda for the rest of the week, domestically or offshore.
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