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The following is a summary of the key events impacting fixed income markets over the past week.
The Reserve Bank of New Zealand (RBNZ) will deliver its fourth and final monetary policy statement this week which once again will result in the Official Cash Rate (OCR) remaining on hold. Further analysis and forecasting post the US unemployment data is no doubt required as the tapering word will be well and truly commonplace once again.
RBNZ – no change
Whilst there is no change expected to the OCR this week, the market will focus on further evidence of the impact of the RBNZ’s macro-prudential tools. The RBNZ has not moved the OCR since 10 March 2011 in response to the Christchurch earthquakes but has indicated that rate hikes are likely in 2014. The million dollar question is when do the hikes begin? And how high will the OCR go?
Three hikes in 2014?
Based on current market pricing, the OCR will be at least 75bp higher in 2014 with three 25bp hikes priced in. At present the market expects the first OCR hike to occur in March 2014 followed by another in June and a further hike in July.
The impact of such expectations is already evident with the NZD/AUD now trading above 0.9000, having started 2013 under 0.8000. The market continues to price in the possibility of further cuts to the RBA’s 2.50% cash rate and hence the attractiveness of the NZD.
The RBNZ is trying to juggle a number of factors but is subject to increasingly strong economic data and inflationary pressures along with the strong NZD. Last week saw the terms of trade at its highest point since 1973.
Swap rates have edged higher in recent times and not just at the long end of the curve. Whilst the 10-year swap rate is +21bp higher over the last month the 1-year and 2-year swap rates have matched that rise.
Long bonds on the move
The positive employment data (see below) saw US long bonds rise with the yield on the benchmark 10–year bond rising to its highest level (2.93%) since 13 September before closing the week at 2.85%. The 10-year yield has increased by +22bp over the last month, however we are yet to crack the 3% level.
US unemployment data
The positive US non-farm payrolls data has sent the market into a bit of a spin with the well-used phrase ‘tapering’ back in every financial news item around the globe. The US economy added 203,000 jobs in November, sending the US unemployment rate from 7.3% to 7.0%. For once there seemed to be no disappointing aspects to the data with hourly earnings rising and a healthy participation rate present.
With unemployment heading towards the Fed’s target of 6.5%, the market is back pondering when the Fed may begin to reduce it monthly bond purchases. While December seems unrealistic given a new Fed boss begins in February, there are some placing the possibility that the 18 December meeting may provide a surprise. Bond guru, Bill Gross, said there is a 50/50 chance that tapering will begin in December, however the consensus seem to believe that March 2014 is when the Fed will begin reducing its US$85bn per month bond purchases.
MPS to provide an economic forecast update
A benefit of the RBNZ’s Monetary Policy Statement (MPS) is an update to the central bank’s economic forecasts. These forecasts provide a guide to how the RBNZ is seeing things and looking back at the RBNZ’s last MPS, published in September, the RBNZ’s forecasts have come up a bit on the light side.
Of the most concern to the RBNZ would be the stronger inflationary figures which showed prices rising 0.9% in the September quarter versus the RBNZ forecast of 0.8% and at an annual rate of 1.4% versus 1.2% expected from the RBNZ. Price stability remains a key focus of the RBNZ and a move back towards the middle of the target range (1% to 3%) has been mentioned several times by the central bank.
The other major concern is the strong NZD which is +1.7% higher at 77.8 on a TWI basis versus a forecast from the RBNZ in September of 74.7. While the strong NZD is helping subdue inflationary pressures, the NZD’s strength against the Australian Dollar would now be centre of that concern. Although on the positive side of things, there are now articles regarding parity between the NZD and the AUD which is usually an inverse indicator.
The key driver of the strength is the diverging views on the possible directions of the respective cash rates. While there is no doubt that the next move of the RBNZ will be a hike, the outlook for the RBA however is not so clear with many still forecasting another rate cut. As these two views diverge the NZDAUD will continue to rise.
The MPS is also likely to highlight whatever data the RBNZ has received on the success of the loan-to-value policy now in play since 1 October. We expect no change to the OCR at Thursday’s MPS however the RBNZ has been very open in its market communication and we would expect that to continue, providing good guidance on future rate hikes.
Corporate / Credit News
APN News & Media (APN) provided an update to the market on its potential divestment of its remaining interest in APN Outdoor. Whilst a contract has been signed, it is conditional and therefore a sale is likely to be completed in late January 2014.
Auckland International Airport (AIA) had its credit rating outlook from S&P lowered from Positive to Stable post its announcement that it would return NZ$454m of capital to shareholders.
The Debt Management Office (DMO) once again received strong demand during its auction of NZ$200m of inflation-indexed New Zealand Government bonds. The bonds mature in September 2025 and were sold at an average yield of 2.878%.
Goodman Property Trust (GMT) through its special purpose vehicle, GMT Bond Issuer Limited launched a seven year senior secured bond offer. The offer opens and closes on 12 December and will begin quotation on the NZDX on 17 December under the code GMB020. The coupon rate will be set on 11 December with an indicative range of 6.20% to 6.30%.
HSBC issued NZ$200m of five year floating rate notes at a margin of 90bp.This was the first domestic issue from the AA- financial institution since 2011.
Infratil (IFT) completed its on-market share buy-back of 24.8m ordinary shares at a final price of NZ$2.38.
The NZX released its monthly shareholder for November which showed there are 85 listed debt securities, down -14.3% versus the pcp. Trading in debt securities was reasonably flat only down -1.9% versus the pcp.
Telecom (TEL) announced it had entered into a binding agreement to sell AAPT for A$450m to TPG Telecom Limited. TEL anticipates that the proceeds will be used to repay debt, if so the company has an EBITDA/Debt ratio of 0.4x.
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