Next DMO tender will test NZGB's position in the world; how tight supply, manageable currency risk, and relative yield attract international investors

By Kymberly Martin

In a fairly quiet start to the week for NZ rates, yields closed up 1-2 bps.

Overnight, US 10-year yields traded between 1.55% and 1.59%.

As we count down the days until the 11 August RBNZ meeting the market virtually fully prices one 25 bps rate cut. Our central case remains for a 25 bps cut next month and a trough in the OCR at 1.75% by year-end. The market prices a trough OCR at 1.68%, within the year ahead.

Early this morning, US 2-year yields pushed higher from 0.72% to 0.74% on a tepid auction of the Treasury bonds. The tender attracted a modest 2.5x bid-cover ratio, its lowest since end-2008. Accepted indirect bids (a proxy for offshore interest, including from Central Banks) was at its lowest level in two years, at 29.9%. But the market remains fairly reluctant to price a Fed hike any time soon. It prices a 55% chance of one 25 bps hike by year-end.

At the longer-end of the US curve, 10-year yields traded toward 1.59% last evening before slipping back to 1.57% currently.

Meanwhile German equivalents have traded down to -0.04% this morning. UK 10-year yields continue to bob along not far from historic lows, currently just above 0.80%.

In this backdrop it is difficult to see demand for NZGBs dissipating any time soon, despite historically low yields. NZGBs appear relatively attractive while global yields remain depressed, NZGB issuance is contained, NZ sovereign risk limited and NZD risk apparently manageable. This Thursday’s NZDMO tender of NZD150m of NZGB 2033s will be the latest test of this view.

Daily swap rates

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