Good Govt accounts will mean lower NZGB issuance, with a long break until the next issue

By Kymberly Martin

NZ swap yields closed up 2bps on Friday while bond yields closed up 4-6bps.

US benchmark 10-year yields traded sideways to end the week at 2.86%. NZ 2 and 5-year swap closed the week at 3.77% and 4.63% respectively, at, or close to their highs since mid-2011.

The 2-10s swap curve sits at 146bps, still well within in the 140-160bps range it has traded for the past four months.

We see this curve flattening to 80bps next year as OCR hikes get underway.

Last week the RBNZ confirmed to us, that it will begin its rate hiking cycle early next year, although not in January. March appears likely.

It also confirmed that the risks around our forecast 4.50% peak (in late 2015) for the OCR are to the upside.

Friday’s DMO auction of $200m of NZGB2020 bonds showed only tepid demand. The bid to cover ratio was a relatively modest 2.4x. The bonds went at a yield of 4.60-4.65%, a little above where they were marked at the time of the tender.

The sell-off in NZGBs saw swap spreads narrow somewhat and spreads to AU bonds widen dramatically.

This week’s HYEFU (17 Dec) will likely confirm a more constrained NZGB issuance program in 2H of the fiscal year.

This should help support NZ bonds, as should the fact there is likely now to be a notable summer break in the issuance program.

It is a huge final week to the working year, domestically. The highlights will be Thursday’s Q3 GDP (we expect 1.0%q/q, 3.2%y/y), Tuesday’s HYEFU and Wednesday’s ANZ business survey.

All are likely to send fairly positive signals about the state of the economy.

But much of this good news is now priced by NZ fixed interest markets and their expectations for almost 125bps of OCR hikes next year.

This is consistent with our own forecasts.