NZGB tenders will be lower for the rest of the year, bond yields drift higher, all eyes now on US non-farm payrolls

By Kymberly Martin

NZ swaps closed up 1 bp across the curve yesterday.

Overnight, US 10-year yields pushed up above 2.36%.

It was a relatively quiet day for NZ swaps, given a lack of domestic data releases and little surprise from the AU employment report.

NZ 2 and 5-year swap closed at 3.90% and 4.17% respectively. The NZ-AU 2-year swap spread sits around 117 bps. We expect this spread to trade a fairly tight range around current levels before narrowing later in 2015.

Yesterday morning, NZ bond yields drifted higher in anticipation of the new 2035 Inflation-Indexed Bond being issued. The syndicate deal was successful with NZ$1.5 bln issued, at a spread of 17 bps to the 2030 IIB. This was in the middle of the 14 bp-19 bps indicative range. This syndication will reduce the size of tenders of NZ Government Bonds for the rest of the year. The limited issuance should help support NZGBs on a relative basis. On the day, NZGB yields closed up 1-3 bps across the curve, with the yield on NZGB23s at 4.02%.

Overnight, the Bank of England and ECB left rates unchanged as expected.

The ECB gave its strongest hint yet it is on the brink of implementing full-blown quantitative easing. President Draghi said staff had been asked to prepare further measures, in order to increase the size of the ECB balance sheet back “towards the measures it had in 2012”. German bond yields experienced some volatility after the announcement, but 10-year has returned to trade close to historic lows, at 0.83%.

US equivalents have pushed up to 2.37% ahead of tonight’s US payrolls release. A solid number (consensus 235k) could be sufficient to see US 10-year yields push back above 2.40%.

In turn, this would likely drag the NZ curve a little steeper. Ahead of the release there is not too much on the local agenda to drive the market today.