The ECB cuts its stimulus back, but signals a longer game. RBNZ mildly hawkish. HYFEU signals more bonds issued now, less later

By Doug Steel

Overnight, US 10-year yields are up about 4 bps to 2.38%, as WTI oil trades up 0.9% at USD50.6/barrel. German Bunds are flat at 0.38% after some volatility around the ECB decision.

The ECB produced a raft of tweaks to its asset purchase programme. Asset purchases will be trimmed to EUR60 bln per month from April next year from the current EUR80 bln. The pool of eligible bonds has been increase to include bonds with a yield below the -0.4% deposit rate and maturities between 1 and 2 years. Moreover, the programme is to be extended to the end of 2017, longer than many expected. So a dovish taper, reinforced by President Draghi’s comments that suggested the ECB could even go back to EUR80 bln if needs be.

So less for longer is the theme. German 10-year bund yields spike around 7 bps higher, but later returned to around pre-meeting levels at around 0.38%.

The NZ short-end remains relatively stable, anchored by an on-hold RBNZ. NZ 2-year swap closed down 1 bp yesterday at 2.26%. Yesterday’s RBNZ Governor’s speech highlighted that the Bank hasn’t changed its November MPS view. Ongoing accommodative policy is to be expected. But the rhetoric in the speech was fairly upbeat with comments noting a positive growth outlook. To us, it was mildly hawkish.

We anticipate a first OCR hike in H1 2018. Consistent with this, we see near-term resistance to NZ 2-year swap breaking above 2.35%. Fundamentally, that level would be consistent with the market pricing OCR hikes from early in H2 next year. We believe that is probably premature, though we believe the risks are now tilted toward an earlier than later start to the hiking cycle.

At the long-end of the NZ swap curve, yields declined. NZ 10-year swap close at 3.315% down 6.5 bps on the day. We expect higher long-end NZ yields next year, aligned to expected moves in US yields, though some near-term consolidation is likely. Ongoing ECB action will remain a constraint on global bond yields pushing higher.

Yesterday’s Half Year Economic and Fiscal Update from the Treasury include a bond programme unchanged in total, albeit with $1 bln extra issuance in the current fiscal year offset by a forecast reduction of $1 bln in 2019/2020. NZGBs will remain relatively scarce with net bond issuance set to decline from 2017/18. The NZDMO intends to issue a new 20 September 2040 inflation-indexed bond, via syndication, before 30 June 2017. Inflation-indexed bonds will account for up to $2.5 bln of the $8.0 bln 2016/17 domestic bond programme. This put some pressure on the existing very long dated bonds including the 2035 NZ inflation-indexed bond with its yield closing 5.5 bps higher on the day, at 2.32%, as the market makes room for the new issue. Today’s $100 mln tender of NZIIB2035’s will be the next test.

Doug Steel is a senior economist at BNZ Markets. All its research is available here.