Booming local service sector doesn't change market settings. Foreign holdings of NZGBs remains high, boosted by safety and yield

By Kymberly Martin

NZ swap and bond yields closed up a further 1-5 bps yesterday, as the curve steepened again.

Overnight, US 10-year yields traded down from 1.98% to 1.94%.

Yesterday’s NZ PSI simply confirmed what we already know; that the NZ services sector is in very good shape.

There was therefore little new domestic information to change market pricing at the short-end of the NZ curve. 2-year swap closed up just 1 bps, at 2.28%.

The market still prices a further 25bps OCR cut by August this year and around a 30% chance of a further cut within the year ahead. This seems a fair balance of current risks, given the RBNZ’s most recent rhetoric that emphasises its concern over declining inflation expectations.

The longer-end of the NZ curve took its cue from the previous night’s further sell-off in US Treasuries.NZ 10-year swap closed up 5 bps, at 3.09%. The NZ 2-10s curve now trades at 80 bps. We now see the probability that the curve steepens well beyond its tight range of the past nine months, to trade above 125 bps by year-end.

The most recent data of non-resident holdings of NZGBs, released yesterday, showed a tick-up from 67.6% to 68.3%. This remains well above long-term average, highlighting the attraction of the relatively ‘safe’ yield available on NZGBs in a world of low/negative yields.

Overnight, in the absence of key data releases, US 10-year yields traded lower with the global oil price. From intra-night highs above 1.98%, US 10-year yields now trade at 1.94%.

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