By Kymberley Martin
NZ swaps closed down 2-5 bps yesterday.
Overnight, US 10-year yields popped from 2.59% to 2.65%, after a high-side US CPI reading.
The decline in NZ swaps appears to be largely driven by another Kauri bond issue (NIB 2019) that led to receiving interest at the mid-curve.
Also contributing was the release of RBA Minutes that saw sub-trend growth ahead due to “substantial falls in mining investment, below-average growth of public demand and non-mining investment remaining subdued”.
Overall, the market was left with the impression that despite its firmly ‘neutral’ policy stance, the Bank would be more likely to cut than to raise rates in the coming 12 months.
This saw AU yields dip lower in the afternoon. We continue to see the RBA on hold until a 25 bps rate hike at the end of next year.
NZ 2-year swap closed down 3 bps, at 4.18%, while 10-yer closed down 4 bps at 4.88%. NZ bond yields also closed down 2-4 bps across the curve, with the yield on NZGB23s at 4.43%.
Overnight, the data highlight was the release of US CPI. This showed May CPI-ex-food and energy at 0.3%m/m (0.2% expected). This equates to 2.0%y/y. US 10-year yields gapped from 2.59% to 2.63% on the result before pushing above 2.65% this morning. The move was mimicked by Aussie bond futures, suggesting lower long-end NZ yields at the open this morning.
Otherwise today will see the release of the NZ current account balance and the latest LGFA bond auction. NZ$135m of 2023 bonds will be the key focus of the tender. Last night’s US CPI release may make the market a little more wary of taking on duration risk ahead of tonight’s US FOMC meeting. Still we expect solid bidding at the tender, but with potential for a 5bps range of successful bids.
Tonight, it will be all eyes on the US Fed.
There is certainly potential for further discussion of US inflation indicators to push US yields higher. However Chair Yellen will have a natural bias to focus on still low signs of wage pressures in the US economy. The Bank of England’s Minutes may also get a brief moment in the spotlight when released this evening.
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