Domestic payers and offshore receivers keeping 2 year swap in a tight range; offshore support of today's DMO auction closely watched

Domestic payers and offshore receivers keeping 2 year swap in a tight range; offshore support of today's DMO auction closely watched

By Kymberley Martin

NZ swaps and bond yields closed little changed, although there was a bit more activity in markets yesterday. Overnight US 10-year yields slipped back to 2.70%.

The tug-of-war at the short-end of the NZ curve between domestic payers and offshore receivers continues.

This is keeping 2-year swap within quite a tight range, and fairly well-supported below 4.0%. We continue to see current ‘fair value’ at 4.30% based on our OCR expectations. We see the OCR at 4.0% by the end of this year, and 5.0% by the end of next.

Today the DMO will auction $200m of NZGBs 2020s.Given this is the first auction of nominal bonds in a month it will be closely watched for demand dynamics, particularly from offshore investors. Currently offshore investors own around 63% of NZGBs.

Overnight, US 10-year yields slipped from above 2.75% to 2.70% after the release of February US durable goods data. Although the headline number came in above expectation (2.2%m/m vs. 0.8%m/m) it was flattered by a bounce-back in transportation. Underlying orders were slightly softer than expected.

Today will bring the domestic data highlight of the week, the NZ trade balance. We expect a strong report. This should support impetus for the RBNZ to get on with its job of returning the OCR to ‘neutral’, (circa 4.25%) in the first instance.

Tonight, the latest reading of US Q4 GDP will be released along with US pending home sales data.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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How can 4.25% be neutral for NZ, when BOE is set at .5% ?   That's .5%   not 5%.
"Inflation has been above target almost every month since the base rate was cut to 0.5pc." in the UK.
Why is NZ the guinea pig for the highest interest rates in the developed world?