NZ yields climb off intra-day lows following Budget; Govt bond auction today will be closely watched as yields look unattractive at current levels

By Kymberly Martin

NZ swaps and bond yields closed down 1-4bps yesterday. Overnight, US 10-year yields broke below the 2.50% level.

NZ yields fell yesterday, following the persistent decline in offshore yields. The yields on 2-year swaps dipped to 3.99% and that on 5-year swap to 4.43%. The 2-10s swap curve has flattened further to 81bps.

NZ bond yields also declined, with the yield on NZGB23s closing down 4bps at 4.26%. However, yields climb off their intra-day lows after the release of the Budget.

The Budget showed a slight increase in NZGB issuance over the next four years (NZ$3b) compared to December’s projections. However, overall supply will still be relatively constrained. The DMO also plans to issue a new 2027 maturity nominal bond to extend the NZ bond curve.

Today’s DMO auction of $200m of NZGB2020s will be of interest. It is the first nominal bond issue in a month, but yields are looking increasingly unattractive, at these levels, in our view.

Nevertheless, the relentless rally in US Treasuries continued overnight. This was despite some solid US data (Empire Manufacturing, Philadelphia Fed) and signs US inflation is picking up.

Core CPI recorded a 1.8%y/y rise in April. Rather, the market appeared inclined to focus on soft US industrial production data, while rising tensions in the Ukraine also didn’t help. US 10-year yields dipped to 2.48% before returning to trade at 2.50% this morning (late last October yields dipped to 2.47% before rebounding).

Today, aside from the DMO’s auction there is not too much to watch on the domestic agenda. Mid-morning (NZT) Fed, Chair, Yellen’s will speak to the US Chamber of Commerce.