Yields on NZGB23s at lowest level since early last August. Spreads to AU and US equivalents fall to bottom of ranges

By Kymberly Martin

NZ swaps closed flat to up 2bps. 

On Friday night US 10-year yields traded from 2.59% to 2.62%.

NZ 2-year swap closed up 2bps, at 3.96%, while 10-year was largely flat at 4.79%.

This saw the 2-10s swap curve flatten to 83bps.

In the coming year we expect the curve to continue flattening as short-end yields rise with the OCR. We see a 50bps trough in the 2-10s curve within this period.

We continue to expect the OCR will reach 5.00% within the next two years. The market prices that it will only reach around 4.30% over this time frame.

We therefore see ‘value’ in hedging at current 2-4-year swap rates. This is the case even after accounting for the possibility that the high level of the NZ TWI slows the pace of near-term OCR hikes.

Meanwhile, yields on NZ bonds continue to slump.

The yield on NZGB23s is now at the lowest level since early last August. Spreads to AU and US equivalents have also fallen to bottom of ranges.

There are several events of interest to the NZ bond market this week. Thursday’s Budget will be accompanied by an announcement by the DMO.

There is potential for it to indicate it plans to issue a longer-dated bond, given NZ’s longest bond is now less than nine years.

However, overall NZGB issuance projections will remain quite tight as the government remains on track to record a surplus in 2014/2015.

Friday’s DMO auction of $200m of nominal bonds will also be closely watched.

Finally,Wednesday will bring the latest figures on non-resident holdings of NZ bonds. It will be interesting to see if recent enthusiasm for NZGBs has curtailed the recent downtrend in the proportion of offshore holdings.

It will be a quiet start to the week with nothing scheduled on the domestic data agenda today. There was also not too much direction provided for rates markets offshore on Friday night. Both US Treasuries and Aussie bond futures traded fairly tight ranges.