New LGFA bond supply welcomed by a market relatively starved of corporate or NZGB issuance

By Kymberly Martin

NZ swap and bond yields pushed higher by 2-4bps yesterday.

Overnight, US 10-year yields drifted down to 2.61%.

NZ 2-year swap has popped back above 4.00%.

This is still well below ‘fair value’ that we see around 4.50% based on our expectation the OCR will reach 5.00% well within the next two years.

We acknowledge the near-term trajectory for the OCR is somewhat dependent on the level of the NZ TWI. However, the RBNZ will be more comfortable with a TWI that appears to be consolidating around the 80.00 level (2% above its forecast 2Q average) rather than pushing up to ever greater heights.

Meanwhile, NZGB yields have also risen by 2-4bps across the curve. The yield on NZGB23s now sits at 4.33%.

Today the LGFA (Local Government Funding Agency) tender will take place. A total of $200m of bonds are on offer, consisting of $10m of 2014s, $10m of 2019, $25m of 2021s and $155m of 2023s.

The small volumes of shorter dates should be absorbed without too much trouble. The larger volume of 2023s may take a bit more digesting, with the possibility of a notable ‘tail’ as seen in some previous tenders. Overall however, the supply will likely be welcomed by a market relatively starved of corporate or NZGB issuance.

Overnight, US 10-year yields dipped from above 2.65% to 2.61% after the release of disappointing April US advance retail sales data (0.1%m/m vs. 0.4% expected)

Today, the RBNZ will release its Financial Stability Report, though some of its thoughts have already been discussed in recent speeches on housing and the diary sector. Data showing non-resident holdings of NZ Government bonds will also be released. We will be interested to see if these are bottoming after being on a declining trend for almost a year.

Tonight, amongst an array of UK labour market indicators, separately the Bank of England will release its inflation report.