By Kymberly Martin
The big move yesterday came in NZ bond yields that closed down 8-10bps.
Swaps closed up 2-3bps.
Overnight, US 10-year yields traded between 2.85% and 2.88%.
Yesterday’s HYEFU highlighted the relatively positive state of the NZ fiscal accounts. The DMO announced it has reduced its 2013/2014 bond issuance program from $10b to $8b, and 2014/2015 issuance from $8b to $7b.
It also announced its specific issuance schedule for Q1 2014 (calendar year). A mere $400m of nominal NZGBs are scheduled to be issued in the quarter, along with $400m of inflation-indexed bonds.
The market now faces an outlook where there will be no new issuance of nominal bonds for ten weeks. This will also coincide with the potential for new year allocation into NZGBs by global fixed income mandates.
We see a potentially very tight supply-demand equation in the near-term.
Already swap spreads have widened significantly.
10-year that has hugged the 30bps level since mid-September, now sits at 45bps. We have long argued we see wider swap spreads as we head into 2014, assisted by relative NZGB supply constraint.
NZ-AU 10-year bond spreads narrowed yesterday (from 71bps to 61bps) as the AU MYEFO stood in stark contrast to NZ’s HYEFU.
NZ swaps closed up a further 2-3bps yesterday. 2-year remains close to its highs since February 2011, at 3.78%. This is close to ‘fair’ relative to our expectation for the OCR to begin to rise in March next year and to be 200bps higher in two years’ time.
Overnight, in the backdrop of soft equity markets, US benchmark 10-year yields continued their sideways shuffle between 2.85% and 2.88%. They sit toward the lower end of this band at present.
Today, RBA Governor Stevens will give testimony in Parliament. Domestically, ANZ business confidence and weekly mortgage approvals will be released.
Tonight, it will be all about the US FOMC rate decision.
However, we do not believe any tapering announcement would likely be sufficient for US 10-year yields to breach their 3.0% highs reached in early September.
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