NZ rates will be under pressure from 'soft' GDT auction; everyone else awaiting FOMC

By Kymberly Martin

The NZ swap curve closed flatter yesterday, while NZ bond yields closed lower across the curve.

Overnight, US 10-year yields trickled a little lower, to 2.06%.

Despite only modest moves offshore the previous night, and an absence of domestic data, NZ bonds rallied yesterday.

The move was likely assisted by the NZDMO’s announcement of its bond tender schedule for the final quarter of the fiscal year.

As expected, just NZ$1.3 bln of bonds will be on offer, of which NZ$1 bln will be nominal bonds. NZ$400m of this issuance has been clustered around the time of the $NZ7 bln, 15 April 2015 maturity.

But we still believe supply-demand dynamics will be tight in coming weeks. We expect wider swap-bond spreads as a result. The yield on NZGB23s closed down 5 bps yesterday, at 3.31%.

The NZ swap curve flattened yesterday as 2-year remained relatively steady at 3.56% while 10-year declined 5bps, to 3.81%. We continue to expect the NZ curve to re-steepen into 2H, but the impetus will likely need to come from a further rise in US long yields. In coming weeks/months we see US 10-year yields trading within a 2-2.30% range.

Overnight, US 10-year yields drifted to intra-night lows below 2.04%, before returning to trade at 2.06% currently.

The market appears reticent to make large moves ahead of the US FOMC meeting in the early hours of tomorrow morning (NZT). The domestic market may show similar sentiment today, though the soft GDT dairy auction overnight may see some downward pressure on NZ short-end yields this morning.