US rates have tracked lower since the release of weaker than expected core durable goods orders data.
The 2-year rate is down 5bps to 0.87% and the 10-year rate is down 4bps to 1.82%, at the lower end of the trading range for the past week.
US bonds remain attractive to Europe and Japan-based investors who face low or negative rates. Foreign demand at US Treasury auctions has been strong this week and last night’s 7-year debt auction showed similar traits. These bond investors are unperturbed by the prospect of Fed tightening and rising inflation in the US.
In local trading yesterday, the weak Fonterra forecast milk payout for the next season set the backdrop for lower rates, and this trend was fuelled further following the Budget announcement.
The stronger set of fiscal accounts in the Budget allowed the Debt Management Office to lower its domestic bond programme by $2bn per annum from 2016/17 through to 2019/20 to $7bn per annum. Some $5bn-$6bn of this will be for nominal bonds, the rest inflation-indexed.Thus, issuance is fairly limited and this adds an element of “scarcity premium” to bond auctions.
By the 2017/18 year, net issuance (ie. after accounting for maturing bonds), will turn negative. The DMO’s policy of extending the duration of its outstanding debt sees the planned issuance of a new 20-year nominal bond (April-2037) in the second half of this calendar year.
NZ bond yields fell 7-8bps across the curve, with the 10-year rate back down to 2.62% and the record lows seen earlier this month under threat again. The NZ-US 10-year government bond spread fell to around 75bps, a fresh low and a spread not seen since 2006. We expect to see further spread compression, possibly down to just 50bps.
The low Fonterra forecast payout got the market thinking about the prospects for NZ rate cuts. The OIS market showed the August meeting priced at 2.09%, down 3bps, suggesting a 64% chance of a rate cut by then. The June meeting is priced at 2.18%, suggesting a 28% chance of a 25bps cut. NZ’s 2-year swap rate ended the day down 4.5bps to 2.27% while the 10-year rate was down 3bps to 2.89%. One can expect further downside risk to rates today, following the US move overnight.
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Jason Wong is on the BNZ Research team. All its research is available here.
1 Comments
These bond investors are unperturbed by the prospect of Fed tightening and rising inflation in the US.
The reach for yield class of investors are like locusts descending upon the newly created poor. The demand for higher non-earned income is being met right across the fixed income credit spectrum.
A borrowing binge by companies globally is poised to make May one of the the busiest months ever, thanks to investors who continue to devour the relatively juicy yields on corporate debt in a negative-rate world.
Global issuance of non-financial company debt will be in excess of $230 billion by month-end, according to data compiled by Bloomberg, led by computer maker Dell Inc., which sold $20 billion of bonds to back its takeover of EMC Corp. in the year’s second-biggest corporate offering. In Europe, companies sold 48.5 billion euros ($54.2 billion) making it the busiest May on record. U.S. borrowers including Johnson & Johnson and Kraft Heinz Co. both did deals of more than 1 billion euros. Read more
The deflationary sucking sound of capital funding vacating all the necessary parts of society to markup net present values of the future coupon payments attached to these bonds is deafening.
Borrowing from the future to fund today's keg party, worthless college diploma, particle board bookcase, stock buy-back, etc. (oops, I mean "investment")--a.k.a. deficit spending which is a polite way of saying this unsavory truth: stealing from our children and grandchildren to fund our lifestyles today. Read more
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