By Kymberly Martin
The NZ swap market yesterday was fairly listless ahead of the FOMC meeting. 2-year swap remained at the top of year to date ranges, around 3.07%, and the 2-10s curve at 114bps.
In the backdrop of a soft Local Government Funding Agency tender the NZGB market came under some selling pressure. Bond yields closed up 4-5bps, underperforming swaps and offshore counterparts.
NZ 10-year swap-bond spreads now sit at 42bps. We maintain that a 35-60bps range is likely justified over the medium term.
Demand dynamics at yesterday’s LGFA bond tender proved softer than at previous events. While the bid-to-cover ratio was a passable 2x, the range of successful bids for the LGFA 2021s was 26.5bps.
The ‘tail’ of the successful bids over the average was 14bps. As a consequence, LGFA yields have been marked wider relative to NZGBs.
But we see this as a healthy correction within their ytd trading range, as opposed to the start of a trend. It is our central premise that after a period of compression since inauguration last year, LGFA-NZGB spreads have now established a range.
The DMO announced the details of its tender for today at $120m of NZGB20s. Following on from yesterday’s soft LGFA tender, today’s DMO auction will be an interesting barometer of current demand for NZGBs.
The surge in yields globally, and increased volatility in the NZGB and NZD market may have reduced appetite, especially from global investors.
In addition, the DMO announced the details of its tender schedule for Q3 yesterday. This will see $300m of nominal bonds and $300m of inflation-indexed bonds issued per month.
The surge in US 10-year bonds from 2.20-2.34%, in the wake of the Fed announcement, suggests NZ yields will open up and be higher across the curve today.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.