NZGB to attract more scarcity premium although key risk remains currency exposure; swaps lower and flatter again

By Kymberly Martin

NZ swaps and bond yields closed down 2-4 bps yesterday.

Overnight, US 10-year yield traded between 2.09% and 2.13%, toward the lower end of this range currently.

Following on from Friday night’s offshore moves, NZ swaps moved lower yesterday. The hostage event in Sydney yesterday afternoon only served to keep sentiment subdued into the close.

NZ 2-year swap closed down 2 bps at 3.80%. The curve flattened a little as 10-year closed down 4 bps at 4.18%. We expect to see further corporate paying enticed out the curve at these levels.

Meanwhile the yield on NZGB23s has fallen to new lows since June 2013, at 3.72%.

Today, the NZD DMO will announce the details of its Q1 2015 tender schedule, alongside the NZ Government’s Half-Year Economic and Fiscal Update.

In fiscal H1 the DMO has issued NZ$5.9 bln of the NZ$8 bln of gross issuance scheduled for fiscal year 2014/2015. We do not anticipate major changes to these full year projections, given the way the Government’s revenues/expenses are tracking. That will leave just NZ$2.1 bln of bonds to be issued in fiscal H2.

An element of ‘scarcity premium’ will therefore remain attached to NZGBs that continue to offer attractive real yields compared to global peers. We see NZGB-UST spreads moving into lower ranges in the year ahead. The key risk for NZGB investors remains currency exposure in our view.

Across the Tasman the RBA will release the Minutes of its December meeting today. Ahead of this, the market prices around 35bps of rate cuts by Q3 next year.