By Kymberly Martin
NZ swaps closed little changed yesterday, still sitting at the bottom of ranges of the past 5 months. The market continues to fully price a RBNZ 25bps cut by mid next year. In recent days the 2s-10s curve has steepened a little to 106bps.
This is around the middle of the 95bps to 115bps range that has been containing the spread for the past 5 months. If the curve moves back toward the bottom of this range it might present opportunities for those with the ability to extend hedging out along the curve.
A key influence on the long-end of the NZ curve remains US and AU long yields. Overnight US 10-year yields traded above 1.61% after the Empire Manufacturing survey came in above expectation, but soon slumped below 1.58% after the weak Philadelphia Fed survey.
Bonds remain right on key resistance levels. There are a lack of critical data releases in the day ahead likely to cause bonds to re-test this resistance.
Tonight, Fed members Fisher and Plosser are due to speak. Both are considered hawks, but neither have an FOMC vote in the year ahead. Still, their comments will likely touch the headlines.
Yesterday’s DMO bond auction once again met with solid demand, with an average 3.6x bid-to-cover ratio.
The successful range of bids was also quite tight. Data earlier this week showed that off-shore investors continue to hold 62.4% of NZ government bonds.
Despite yields on NZ bonds being close to historic lows, yields in a global sense remain fairly attractive. In the near-term however, we do expect NZ long bonds to underperform their AU counterparts.
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