By Kymberly Martin
There was a notable move higher and steeper in the NZ curve yesterday.
Overnight, US 10-year yields drifted down to trade at 2.21% this morning.
Following last Friday night’s US payrolls data NZ yields pushed higher and the curve steeper yesterday. While there appeared to be two-way flow at the short-end of the swap curve to help keep yields contained, there was only paying pressure at the long-end.
NZ 2-year swap closed up +3 bps, at 3.61% while 10-year closed up +8 bps, at 3.95%.
At 34 bps the 2-10s curve is now at its steepest point since mid-Dec.
The LGFA yesterday announced details of its bond tender that will take place tomorrow. NZ$100m of a new LGFA 2027 maturity bond will be issued. Other bonds to be offered are: NZ$20m of 2020s, NZ$30m of 2021s and NZ$10m of 2023s.
Offshore ownership of these bonds continues to grow steadily and now stands at about 23% of outstanding bonds.
Domestic and issuer specific factors support strong demand for the LGFA bonds tomorrow. The biggest risk to demand lies with recent offshore events. Investors may be reticent to add to duration in an environment where Fed rate hikes appear increasingly imminent.
We continue to see a first Fed rate hike in June this year and a 1% FFR by year-end. Fed fund futures currently price a 0.55% FFR by this time.
Overnight, in fairly quiet, data-light markets, US 10-year yields drifted a little lower. From 2.23% last evening, yields touched intra-night lows of 2.19% early this morning before returning to trade at 2.21%.
There is little scheduled domestically in the next couple of days to impact on rates markets ahead of the RBNZ’s meeting on Thursday.
Here we expect the RBNZ to play a very straight bat and to flatten its published 90-day bank bill trajectory. Still, this will hardly come as a surprise to the market that already prices around a 70% chance of an RBNZ cut in the year ahead.
We do not expect a cut, but rather for the Bank to be on prolonged hold.
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