There was not too much action in NZ rates yesterday. Yields closed down around 1bps across the bond and swap curve. Overnight, US 10-year yields have traded between 2.44% and 2.48%.
The sell-off at the long-end of the NZ curve ran out of steam yesterday. NZ 10-year swap closed down 1bps, at 3.45%. Similarly the yield on generic 10-year bonds also closed 1bps lower, at 3.29%. Tomorrow the NZDMO will conduct its final bond auction for the year.NZD150m of NZGB2037s will be offered. We anticipate good demand for the bonds now that momentum in the global bond sell-off appears to be abating, and given this will be the last NZGB auction until well into next year. NZGB2037 yields closed at 3.99% yesterday, up 115bps since the start of October.
Today the LGFA (Local Government Funding Agency) will also hold its final tender for the year. NZD25m of LGFA20s, NZD100m of LGFA25s and NZD45m of LGFA27s will be on offer. We expect solid demand, as longer-dated spreads to NZGBs are within the upper-band of their range and global credit risk appetite remains healthy.
Overnight, German 10-year yields have traded lower. From 0.40%, they now sit at 0.35%. This has likely contributed to keeping a cap on US 10-year yields.US 10-year yields now trade at 2.47%, as US-German 10-year spreads are at 212bps.
Tomorrow morning the US FOMC will meet and is set to deliver its second hike of this cycle. The last was in December 2015. We and the market believe the Fed’s “gradual” tightening process may pick up marginally from this sloth-like pace next year. We anticipate two more hikes.
A hike from the Fed tomorrow should surprise no one. The Fed’s medium-term ‘dot points’ and commentary will therefore gain the attention. The ‘dots’ still sit some way above market pricing, though the gap has closed in recent months as market pricing has moved higher. The market will also be alert to any reference by the Fed to the monetary tightening that has already occurred due to a higher USD and long rates.