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Rates are up across the curve in NZ and the US.
After a sleepy local trading session on Monday, the market decided that NZ rates had not moved up enough post the RBNZ’s MPS.
We saw an aggressive move up in yield across the curve, with the 2-year swap rate up 5.5 bps to 2.82% and the 10-year rate up 7 bps to 3.67%. While mortgage and corporate paying, and expectations thereof, are putting upward pressure on the curve, no fresh receivers are (yet) willing to dive into the market this side of Christmas. The bank bill/OIS spread has also been drifting up, as it has been in offshore markets, and this is putting upward pressure on swap rates. We think that the 2-year swap rate is approaching the top of its likely trading range of the next six months.
The government’s mid-year fiscal update showed a modest deterioration in the fiscal accounts, largely due to lower inflation and less tax revenue. A small deficit is now projected for FY2016, while small surpluses return beyond that period. Just like the RBNZ is taking a flexible approach to inflation targeting, the government is taking a flexible approach to getting back to into surplus. Rather than cut spending, the government is choosing to increase borrowing.
The NZ DMO’s updated bond issuance programme showed that while the current year’s programme will be maintained at $8 bln, future years will raised by $2 bln per annum to $9 bln. The bond market didn’t react to the news and for good reason – net issuance remains limited over coming years and the government’s debt position remains enviable by most developed market standards. Yesterday, the 10-year NZGB rate (Apr-27) closed up 5.5 bps to 3.57%, but this move was more a reflection of the action in the swap market than reaction to the fiscal projections. We continue to see long-dated NZ-US government bond spreads as fairly range-bound. The greater risk to NZGBs at the moment lies with increased global bond volatility, causing investors to sell illiquid assets.
Australia’s fiscal update also showed deterioration in the financial accounts. In the next 4 fiscal years, the forecast deficit will be $26 bln larger than previously anticipated. Those hoping to see a budget surplus will now have to wait another year, namely 2020-21.
The RBA’s December minutes were not market moving – they continued the somewhat more upbeat reading by the RBA of the prospects for the Australian economy. As such, they suggest little risk of any near-term reduction in interest rates, while continuing to acknowledge that spare capacity exists and that low inflation may afford some scope to ease policy further should the economy require further support. Our colleagues at NAB continue to see rates on hold for an extended period.
Overnight, US CPI data were in line with market expectations, confirming core inflation at 2.0% y/y, a mild uplift from earlier in the year, and helping cement expectations of the first Fed tightening in almost a decade tomorrow.
The US 2-year Treasury rate was up 2 bps to 0.96%, its highest level in nearly 6 years. The US 10-year rate traded in a range of 2.20% to 2.29% and is currently up 4 bps for the day at 2.26%.