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Strong bond demand supports strong issuance, mortgage demand solid, FOMC confirms policy track

Bonds
Strong bond demand supports strong issuance, mortgage demand solid, FOMC confirms policy track

By Kymberley Martin

NZ swaps were up 3-5bps yesterday while bond yields closed up 5-6bps.

NZ yields pushed higher following the previous night’s moves offshore.

Solid paying activity from the mortgage sector continues to be seen, helping push swaps higher.

There was a lack of receivers to offset this flow, likely wary ahead of this morning’s US FOMC meeting and today’s NZ GDP release. NZ 2 and 5-year swap closed at 4.21% and 4.61% respectively.

NZ bond yields also pushed higher, following offshore moves and in anticipation of the DMO’s chunky $300m tender of NZGB2020s today.

There was also plenty of supply of alternative credits yesterday with a print of $200m of Rentenbank bonds and $155m of LGFA bonds.

The LGFA tender was solid overall. The $135m of LGFA2023s attracted a 2.1x bid-to-cover ratio and a 9bps range of successful bids. LGFA23s are now marked around 82bps over NZGB equivalents, at an outright yield of 5.31%.

At this morning’s US FOMC announcement the Fed reduced its asset purchases by a further US$10b to US$35b/month. Its statement was little changed from previous.

It spoke of improving momentum in the economy but interestingly retained the reference to downside risks to inflation; “inflation persistently below its 2 percent objective could pose risks to economic performance”. US Treasuries initially experienced some volatility but, the long-end now sits a little lower in yield. US 10-year yields sit at 2.60% and US 2-year at 0.46%.

Fed officials’ median forecasts for the Fed Funds Rate have risen for the near-term. They now see the FFR at 1.13% (prev. 1.00%) at end 2015, and 2.50% (prev. 2.25%) at end 2016. Conversely they have revised down their forecasts of the ‘neutral’ long-term FFR to 3.75% from 4.00% previously. The latter will help limit any near-term rebound in longer-dated US yields.

After Chair Yellen’s press conference all eyes domestically will be on the release of NZ Q1 GDP. Although expectations (consensus, ours, RBNZ’s) are already pretty hefty at 1.1%q/q the risks are still tilted to the upside.

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