[This commentary was prepared before the US Fed hike decision.]
NZGBs outperformed NZ swap yesterday.
The LGFA had a good tender and the NZDMO announced its issuance schedule for calendar Q1 next year.
Overnight, core offshore long yields drifted lower, ahead of the US FOMC meeting at 8am (NZT) this morning.
NZ swaps closed 1 bps higher across the curve yesterday, while NZGB yields declined 1-2 bps, resulting in wider swap-bond spreads.
In the afternoon the LGFA (Local Government Funding Agency) conducted its final tender for the year. It was well received. Bid-to-cover ratios for the three lines on offer ranged from 2.5x to 6x.
Today the NZDMO will conduct its final bond auction for the year.NZD150 mln of NZGB2037s are offered. We anticipate good demand for the bonds given that momentum in the global bond sell-off now appears to be abating, and this will be the last NZGB auction until 19 January. The NZDMO announced the details of its Q1 issuance next year, which will see a total of NZD1.25 bln issued over the quarter.
Overnight, the short-end of the US curve moved very little as the market awaits the US FOMC meeting, shortly. A rate hike today is all but guaranteed so attention will instead fall on the Fed’s ‘dot points’ and commentary.
However, there was a bit more movement at the longer-end of the curve. US and German 10-year yields both drifted lower over the course of the night. From 0.36%, German yields now trade at 0.31%. From 2.47%, US yields trade at 2.43%.
Following the US FOMC meeting the local focus today will be the AU employment report. Currently the market prices only around a 20% chance of a further RBA cut next year. It is also beginning to price a small chance of rate hikes from early 2018. By contrast, our NAB colleagues still see the possibility of a further two rate cuts later next year.