LGFA demand levels show support solid for NZ debt despite falling currency. US Fed minutes fail to clarify when rate hike will come

By Kymberly Martin

The NZ swap curve steepened a little yesterday.

Overnight, US 10-year yields experienced some volatility but have fallen to trade near 2.15% currently.

NZ swaps initially pushed 3 bps higher yesterday morning, in response to the previous night’s bounce in GDT dairy prices. However, the move was not sustained and 2-year swap closed unchanged, at 2.89%.

Meanwhile 10-year swap pushed 3 bps higher, taking the 2-10s curve back to 75 bps.

Yesterday afternoon’s LGFA (Local Government Funding Agency) tender was ok overall, without being outstanding. But it demonstrates still solid demand for NZD rates product, despite a declining currency trend.

The LGFA 2020, 2023 and 2027 bonds were sold 2-3 bps back from where they were marked prior to the tender. The bid to cover ratio was strong for $NZ25m of 2023s (3.6x) and $100m of 2027s (2.4x) but a bit thinner for the $NZ$50m 2020s (1.74x). Over the longer-term we continue to expect further LGFA-NZGB compression, as offshore ownership of the bonds continues to grow from their current level of around 27%.

Overnight, US yields experienced some volatility after the release of US CPI data. The initial response to the low-side reading of core CPI (0.1%y/y) was a jag lower in yields. However this proved short-lived as US 10-year yields then climbed above 2.22% in the early hours of this morning.

Another bout of volatility then ensued after the release of the US Fed Minutes. Most officials felt they were “approaching that point” for a first rate hike but conditions hadn’t yet been reached. The lack of broad-based firming of wage increases was discussed. There was “considerable” uncertainty on when wages might accelerate and whether that might result in increased inflation.

The Minutes did not clearly point at either Sept or Dec as timing of first hike. Consequently the market remains ambivalent on a Sept hike.

US 10-year yields now trade at 2.12%, while 2-year yields have dipped to 0.66%.


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

Daily swap rates

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