Expection is for strong demand for LGFA bonds; anticipation of increased offshore investor participation in 2014

By Kymberly Martin

It was another relatively lacklustre day in NZ swap markets, with yields closing up 1-2bps. Overnight, US 10-year yields subsided a little further to 2.81%.

As we head into Thursday’s RBNZ meeting we continue to believe the market is a little ahead of itself in pricing an almost a 40% chance of a rate hike by January. We do not expect the RBNZ’s Monetary Policy Statement to justify this pricing though we do expect a first hike mid-H1.

NZ 2 and 5-year swap yields closed at 3.73% and 4.58% respectively. The 2-10s curve remains around 146bps steep.

Today, the LGFA will tender NZ$105m of LGFA21s, along with $NZ35m of LGFA17s and $NZ10m of LGFA15s. We anticipate solid demand heading into the holiday season, though the large volume of the long-dated maturity may be a little more difficult for the market to absorb.

Ultimately, the key theme for LGFA bonds next year will be increased offshore participation. It is currently estimated only around 7% of the issuer’s bonds are held by non-residents.

Overnight, US 10-year yields subsided to 2.81%, in the backdrop of slightly soggy equity markets, but limited US data releases.

Today, the RBNZ’s weekly mortgage approvals data will be released. These have taken on greater importance since the introduction of LVR restrictions at the start of October.

Otherwise there is little scheduled on the domestic agenda ahead of tomorrow morning’s RBNZ meeting. Tonight, US mortgage applications will be released.

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