NZGB bonds don't rally despite strong NZ Govt accounts. Opens up possiblility of fewer bond tenders. Eyes on US Fed

By Doug Steel

Global yields consolidated on Friday night. US 10-year Treasury yields spent the latter part of last week just above 2.50%, but closed the week at 2.48% after dipping modestly on the softer US GDP headline figures.

NZ’s Friday session was lacklustre with no data to drive material change. NZ swap yields generally closed a touch higher, with a steepening bias. NZ 2-year swap closed up 1 bp at 2.465% on the day, 5-year swap up nearly 2 bps at 3.0855, and 10-year swap up 3.5 bps to nearly 3.61%.

NZGBs underperformed swap again, selling off across the curve on Friday. It’s notable that bonds couldn’t rally despite a good NZGB 2037s tender (at a bid to cover ratio of 3.69). The market ignored the much better than expected government accounts that came in a whopping $936 mln ahead of (the December HYEFU plan) for the first five months of the fiscal year. If the government keeps printing improvements like this it is not hard to imagine a possible reduction in bond supply somewhere down the track. But we wouldn’t overstate that case just yet as, of course, other fiscal plans would come into that equation, and it is election year. We might get some further broad guidance around such plans from PM Bill English’s State of the Nation speech on Thursday.

Lots of event risk this week (despite Lunar New Year holidays; note also it is an Auckland regional holiday today). The Fed’s FOMC meeting Thursday morning NZT is most eagerly anticipated by the market. Will the Fed hint at a March rate rise? The market currently prices a 72% chance of a Fed hike in March, with a 25 bp hike more than fully priced by June. Meanwhile, steady policy is widely anticipated from the BoJ tomorrow and universally expected from the BoE overnight Thursday.

Data wise, Monday’s EU provisional CPI data which is expected to rise from 1.7% to 2.0% is worth watching as it threatens the ECB’s target (for the whole of the Eurozone) of “close to, but below 2.0%”. Market direction over the week will also be dictated by reaction to the U.S. ISM and payrolls data later in the week.

Daily swap rates

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for(i=0;i

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Doug Steel is a senior economist at BNZ Markets. All its research is available here.