As international risk aversion grows awaiting British vote, longer dated NZGBs look increasingly attractive

By Kymberly Martin

NZ swaps closed down 3-5 bps yesterday, outperforming NZ bonds.

Overnight, US 10-year yields traded between 1.57% and 1.62%.

In the absence of key domestic data releases yesterday, NZ yields took their cue from offshore. The greatest downward pressure on yields came at the long-end of the curve. NZ 10-year swap closed down 5 bps, at 2.75%. NZ 2-year swap closed down 3 bps, at 2.26%, as the market now prices an OCR cut by the November meeting. It also prices a trough in the cash rate at around 1.95%. For comparison the market looks for the RBA’s cash rate to be cut toward 1.40% in the year ahead.

Overnight, an environment of risk aversion prevailed. In this backdrop, while equities have made solid losses, credit spread proxies have pushed much wider in Europe. US Treasuries remain a ‘safe haven’. US 10-year yields dipped below 1.57% intra-night. They now trade at 1.60%. UK equivalents have touched new lows at 1.14% German 10-year yields have traded into negative territory for the first time. Trading as low as -0.03% last evening they now sit just below zero.

This is an environment where longer-dated NZGBs will remain attractive. Expect downward pressure on yields to remain. Also look out today for the LGFA’s (Local Government Funding Agency) latest tender. Along with NZD40m each of LGFA 2019s and 2023s it is offering a new LGFA 2025 maturity bond. Demand for the bonds will be caught between two key forces: appeal of the yield in a low yield world (the new bond likely offers more than 90bps over NZGBs); dampened appetite for ‘credit’ in the current environment of risk aversion.

Tonight, the US FOMC will meet. It is almost certainly not going to announce any rate changes. It will also likely provide a conciliatory tone to avoid creating further volatility ahead of the UK referendum. It will also likely show further downgrades to its ‘dot point’ projections of the future Fed funds rate track. It is hard to see the market being prompted into increasing expectations for near-term Fed activity. Currently the market prices only slightly more than a 50% chance of a 25bps hike by year-end.

Daily swap rates

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for(i=0;i

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Kymberly Martin is on the BNZ Research team. All its research is available here.