NZGB 2037 $2 bln tender well supported, yielding 2.915%. 2yr swap on track to fall to 1.8% based on RBNZ signals and guidance. Eyes now on Yellen speech

By Kymberly Martin

NZ swaps declined 1-2 bps yesterday. Overnight, US yields continued to trade a range, currently at 1.57%.

In a quiet domestic data week the short-end of the NZ curve remains little changed. The market prices around a 20% chance of a RBNZ rate cut next month and a 1.57% trough in the OCR within the year ahead.

We continue to look for the OCR to be cut to 1.50%, at least, in this cycle. We anticipate cuts at the November and February meetings. The Reserve Bank has made clear its preference to take action at meetings that are MPSs rather than OCR reviews.

NZ 2-year swap closed for the day down 1 bps, at 1.97%. We continue to see it trading down toward 1.80% in the months ahead. However, a better opportunity to receive may arise after the September release of NZ Q2 GDP and the RBNZ’s September meeting.

The NZDMO priced its new NZGB 2037 yesterday as expected. The book size within the initial price guidance exceeded NZD2.5 bln. The maximum issue of NZD2 bln resulted. The bonds were issued at 27 bps over the NZGB 2033, at a yield of 2.915%. This was the tighter end of the original 25-31 bps guidance range. After the announcement the NZGB 2033 rallied into the close. Its yield closed down 2 bps on the day.

Solid demand shown at the syndication gives us confidence in our view that supports for NZGBs remain intact (outright yield in a low yield word, limited sovereign risk, constrained issuance over the next four years, an easing Central Bank and contained NZD risk). We believe NZGB outperformance relative to NZ swap and USTs can now resume.

Overnight, markets remained in limbo ahead of the scheduled speech by Fed Chair Yellen at Jackson Hole tonight. Ahead of this the market now prices 16 bps of Fed hikes by year-end. We do not think Yellen would be particularly uncomfortable with this pricing. US 10-year yields are currently at 1.57%, having traded a tight range overnight.  We would be stunned if the inherently cautious Yellen proved the catalyst for US 10-year yields to break above recent range highs i.e. 1.63%. But we stand ready to be surprised.

Daily swap rates

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