The NZ swap curve flattened yesterday but the most notable moves were in the NZGB curve. Long-end bond yields closed down 12bps.
Overnight, US 10-year yields crept up from 1.99% to 2.02%.
Short-end NZ swaps remained fairly firm yesterday. Domestic data delivery (PMI and consumer confidence) was solid.
The market was also likely still underpinned by the previous day’s RBNZ speech that suggested the Bank has a high hurdle to undertaking aggressive further easing.
NZ 2-year swap closed up 2bps, at 2.73%. By contrast, longer-dated swaps appeared to take their cue from the previous night’s move lower in offshore yields. NZ 10-year swap closed down 5bps, at 3.49%.
Larger moves were seen in NZGB yields. These started to trade lower from the open, taking their cue from offshore moves but also anticipating the pricing of the new NZGB2033. The bond was priced in the early afternoon. It attracted strong demand.
The maximum NZ$2b was issued after more than NZ$3.8b of bids were received. The bond priced at the tight end of its guidance range, at 33bps over NZGB2027s, a yield of 3.64%.
On the day, NZGB2027 yields closed down 12bps. These moves resulted in wider swap-bond spreads and narrower NZGB-UST spreads. However, we expect these spreads to move further, given how much long-dated NZGBs had underperformed in recent weeks in anticipation of the new bond. In our view, fundamentals still support narrower NZGB-UST spreads.
Overnight, US 10-year yields traded from 1.99% up to 2.02%. Yields initially gapped higher after the release of stronger than expected Sep CPI. The release also saw US 2-year yields gap from 0.56% to 0.59%.
Today, it will be all eyes on the release of NZ CPI. We are aligned with consensus in expecting a 0.2%q/q rise, which would see the annual rate tick down to just 0.3%. Intuitively we see risks tilted slightly to the downside.
A low-side reading could cause the market to increase its pricing of a rate cut by year-end. Our core view remains a further 25bps cut by year-end, taking the OCR to a cyclical trough of 2.50%.