Offshore investors still keen on NZ Govt bonds. US yields push higher on calmer markets, expected US data

By Kymberly Martin

NZ swap and bond yields rose 1-6 bps yesterday.

Overnight US 10-year yields pushed up from 2.14% to 2.18%.

The NZ swap curve steepened yesterday, taking its cue from the rebound in US long yields in the early hours of yesterday morning. NZ 2-year swap closed up 3 bps, at 2.87%. The 2-10s curve sits at 76 bps.

There was a solid NZDMO auction of NZ$200m of NZGB2027s yesterday afternoon. The bonds were sold at an average yield of 3.2675%, inside where the bonds were marked prior to tender, circa 3.28%. That said, the bid-cover ratio was a more modest 1.8x. The NZGB2027s are the only longer-dated NZGB the DMO has scheduled for tender this quarter.

The backdrop remains one of relatively constrained NZGB issuance, as the Government approaches operating surplus.

Demand appears undeterred by the recently retreating NZD. In this respect, we will be watching for today’s July data of non-resident holdings of NZGBs. In June these had ticked up to 69.7%, despite downward currency moves.

History shows that offshore investor’s proportional holdings of NZGBs do fall with sustained declines in the NZ TWI. However, the lag is often as long as 24 months. Given the NZ TWI peaked around a year ago, it is possible it is some time before we see reduced offshore demand for NZGBs.

Overnight, US yields pushed a little higher across the curve, in the backdrop of calmer markets that appear to becoming accustomed to the new Chinese currency regime.

The move was also assisted by US retail sales data that failed to provide any nasty surprises. US 10-year yields trade at 2.18% this morning.

Kymberly Martin is on the BNZ Research team. All its research is available here.