Weaker Germany factory orders data drove 10-year German bunds down 3 bps to a slither under 0.10%, its lowest level in about a year.
US rates are also lower on the risk-off mood, with the 10-year Treasury rate down 4bps at 1.73%. The gain in the 10-year yield up to almost 2% ahead of the March FOMC meeting has now been fully unwound.
The yield is fast approaching the lowest close of the year of 1.66%.
The RBA Statement came after the local close. The RBA left the cash rate unchanged at 2%. The final paragraph of the Statement added an “outlook for inflation” terminology for its policy assessment. That states the obvious for a central bank, but it might also imply a closer watch on actual inflation and inflation expectations data as a trigger for any further rate cut.
In local trading yesterday there was little change in rates, with swap and bond yields all contained within a basis point of the previous day’s close. The 2-year rate is at 2.175% and the 10-year rate is at 2.94%. OIS pricing for the Apr-28 meeting got down to 2.13%, essentially implying a coin-toss for a 25 bp rate cut, although it closed the day at 2.1425%, implying a 43% chance of that occurring.
The gap between the NZ and Australian 2-year swap rate is now less than 10 bps. We expect a cross-over over coming weeks/months, with NZ rates heading below that of Australia. It feels inevitable that further rate cuts will be priced into the NZ curve relative to that of Australia.
The LGFA will hold its next tender today. NZD50m of LGFA 2020 and 2021s are on offer along with NZD40m of LGFA 2023s and 2027s. It is a relatively chunky tender. At a total of NZD180m, it is the largest total offer since June last year. A number of factors have combined in recent months to drive LGFA spreads markedly wider relative to swap. LGFA relative value to NZGBs and Kauri SSAs has also improved. Longer-dated LGFA-NZGB spreads are now at historic highs, with LGFA-NZGB 2027 spreads marked above 100bps. We believe this will support demand at the tender.
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Jason Wong is on the BNZ Research team. All its research is available here.
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