US PCE inflation stuck at 1% despite upward revision to US GDP. Strong demand for NZGBs with them outperforming related benchmarks

By Kymberly Martin

Ahead of the Easter break, the NZ swap curve flattened slightly and NZGBs outperformed. Since this time, US 10-year yields have traded between 1.85% and 1.92%.

NZ 2-year swap ended last week at 2.26% as the market prices that the OCR will be cut to 1.90% by early next year. It still assigns only around a 30% chance of a further 25 bps cut at the end-April meeting. We would place these odds at closer to 50/50.

The NZ 2-10s swap curve ended the week at 82 bps, still well within its relatively tight range of 60-95 bps maintained since mid-last year. Ultimately we see the upper end of this range being broken as the year progresses, assuming higher US long yields will ultimately drag the long-end of the NZ curve higher.

Over the past couple of trading days, US 10-year yields have traded a fairly well-trodden path. It has largely mimicked directional moves in the global oil price. Yields touched lows around 1.85% early on Friday morning, ahead of the Easter break. In trading yesterday they made highs close to 1.92% before returning to 1.87% currently. The US data released over the period has shown that Q4 GDP was revised higher to 1.4% q/q ann., but that inflation, as measured by the Fed’s preferred PCE deflator, remains contained at 1.0% in February.

Ahead of the Easter break the NZDMO also held its latest tender of NZD100m of NZGB 2033s. It attracted strong demand. The bonds were sold at an average yield of 3.36%, inside the mid broker yield prior to the auction, of 3.38%. The bid-cover ratio was also a healthy 2.7x. This comes on the back of the previous week’s strong tender of NZGB 2020s. Demand for NZGBs appears to remain undented in the current world of low/negative yields. As the year progresses we anticipate NZGBs can outperform NZ swap, USTs and ACGBs.

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