Weak Aussie data cues NZ falls, but markets unsure of RBNZ moves on December 10. Big demand for latest NZGB tender

By Kymberly Martin

NZ swaps closed down 1-5 bps yesterday while bond yields declined 6-7 bps.

Overnight, the US market was closed for Thanksgiving while German yields traded sideways.

NZ swaps slipped across the curve in the afternoon, taking their cue from moves across the Tasman, after a soft headline AU Q3 capex number. The market has slightly increased its expectations for RBA cuts, to 20 bps, by mid next year.

The NZ 2-10s curve also flattened from 87 bps to 84 bps.

The market continues to price around 35 bps of RBNZ cuts by mid next year, but only a 55% chance of a cut on 10 December. A 25 bps cut at this meeting remains our core view.

There was good demand shown at yesterday’s DMO tender of NZD200 mln of NZGB2020s. The auction attracted a 5.3x bid-cover ratio and the successful yield (2.87%) was inside pre-tender marks. The tender suggests some tentative interest may be returning to the NZGB market after the recent sharp fall in NZ swap-bond spreads and underperformance of NZGBs versus ACGB and UST equivalents.

We are now close to levels we have highlighted to buy NZGB23s relative to swap (target entry 10 bps on ASM) or NZGB27s relative to UST27s (target entry 130 bps). The next tender of nominal NZGBs (2027s) is not until 17 December. However, we note this will be hot on the heels of the US FOMC announcement in the morning. A Fed hike could have the market jittery and reticent to immediately add to NZGB duration.

In a very quiet night, as the UST market remained closed, European equities rallied, credit spread proxies narrowed slightly and core bonds traded tight ranges. German 10-year yields now trade at 0.47%. It looks to be a quiet end to the week, in the absence of local data releases. The release of UK GDP will likely be in the spotlight tonight.

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