The NZ buyback of Govt debt will keep yields low, make supply of Govt stock very tight

By Kymberly Martin

It was another quiet day in NZ rates markets. Overnight Yellen’s comments did little to unsettle markets.

NZ swaps closed up 1-2bps across the curve in quiet trading. Similarly, NZGB yields only pushed a little higher at the mid-curve.

The most notable news yesterday was the announcement from the NZ DMO it will buy back $500m of its NZGB 2015s via a reverse tender today. This had been signalled in the December HYEFU.

The DMO will repurchase up to $3b of the market bonds on issue ($10.8b) in 2H 2013/2014. This is an additional factor that will contribute to supply-demand tightness in the NZGB market.

The next tender of nominal NZGBs ($200m) is not scheduled until 27 February. We therefore do not see NZ 10-year bonds as an aggressive sell despite yields being at the lower end of expected ranges on outright levels and relative to US and AU counterparts.

Overnight, new Fed Chair, Yellen’s address to the House was the highlight offshore. She confirmed that the Fed will continue its gradual pace of ‘tapering, despite turmoil in emerging markets and the drop off in the pace of employment growth. She emphasised continuity with ex-Chair, Bernanke’s previous policies.

She did not make any adjustments to the Fed’s 6.5% unemployment threshold as the point to reconsider the low cash rate.

Despite the unemployment rate now being at 6.6%, she rather emphasised rates will stay near-zero until “well past” the time this threshold is met.

Overall, her testimony appeared to have the desired impact. It neither prompted volatility in markets, nor greatly impacted on Fed’s fund futures. These continue to price a first hike from the Fed in 2H 2015. US 10-year yields stepped up a little from 2.68% to 2.72%.

Today it is another relatively low-key affair on the domestic front. The offshore highlight tonight will be the Bank of England’s inflation report. Similar to the Fed, if inflation is shown to be contained, it may take the opportunity to remind markets it will keep rates ‘on hold’ even when unemployment targets are met.