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Local rate direction in hands of global backdrop. Eyes on both the LGFA tender and GDT prices, which could fall another -10%

Bonds
Local rate direction in hands of global backdrop. Eyes on both the LGFA tender and GDT prices, which could fall another -10%

By Kymberly Martin

NZ swaps and bond yields closed up 2-6 bps yesterday.

Overnight, the US market was closed for President’s Day but German 10-year yields traded down from 0.29% to 0.24%.

NZ yields pushed higher and the curve steeper yesterday, taking their prompt from the previous night’s rise in US Treasury yields. NZ 2-year swap closed up 3 bps, at 2.57%. The market still prices just over 30 bps of RBNZ rate cuts by year-end. This pricing could extend to up to 50 bps in coming weeks/months, in our view. This is particularly true if the global backdrop remains volatile and the outlook for the domestic dairy sector weak, while the NZD TWI remains resilient to both.

In this regard, the market will keenly watch the result of the latest GDT auction in the early hours of tomorrow morning. We anticipate it will be weak, with overall prices falling in the order of 10%.This would likely only encourage NZ short-end yields to price further chance of RBNZ rate cuts. This could see NZ 2-year swap trade down toward its mid-2012 lows closed to 2.35%, in coming weeks/months.

At the long-end of the NZ curve, swap and bond yields pushed 5-6 bps higher yesterday. NZ 10-year swap closed at 3.19%, taking the 2-10s curve to 62 bps.

Overnight, while the US market was closed for President’s Day a positive mood prevailed over European equity and credit markets. As ECB’s Draghi conditionally offered further easing if necessary, German bond yields declined across the curve. German 2-year bonds now offer a yield of -0.52% while 10-year yields declined from close to 0.30%, to 0.24%.

Yesterday, the NZ LGFA announced the detail of its first tender since December, to be held on Wednesday. It will offer NZD20m of 2020s, NZD50m of 2023s and NZD50m of 2027s. Spreads to NZGBs have widened notably since last tender, improving relative value. Yields also stand-out in a world of increasingly common negative yields for high grade Government debt. e.g. LGFA 2027s offer an outright yield of over 4.0%. Offsetting these attractions, the name will continue to be viewed as a ‘credit’ in a global environment where appetite for credit risk is currently low.

It will be worth keeping an eye out for today’s release of the RBNZ’s inflation expectations survey. The Bank has made it clear it is more concerned about developments in core inflation and inflation expectations than persistently low headline inflation.

Daily swap rates

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Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA

 

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