Post Budget NZGB supply update
Bond programme revised modestly higher
New Zealand Debt Management (NZDM) updated the bond programme today alongside the Budget Economic and Fiscal Update (BEFU). Forecast gross New Zealand Government Bond (NZGB) issuance has been increased by a total of NZ$4 billion over the forecast period to June 2029, compared with the Half Year Economic and Fiscal Update (HYEFU) in December. Gross issuance has been revised higher, at each borrowing programme update since December 2021, reflecting ongoing fiscal pressures.
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Rates Strategist: Lower rates amid subdued rebound
• Headwinds from the global growth downshift, combined with subdued domestic high frequency activity indicators, skew the risks for front end NZ rates lower. The RBNZ is expected to cut rates by 25bp at the May 28 Monetary Policy Statement, signal room for further easing, and shift its modelled OCR path lower.
• Curve steepening is likely to resume now the April overshoot has corrected.
• The compensation for taking duration risk is improving. 10Y NZGBs offer the highest FX hedged yield within developed markets. Although the backdrop for duration appears favourable, we have a higher conviction for shorter maturities.
• NZ swap spreads are expected to consolidate ahead of the borrowing programme update alongside the Budget on 22 May. A pre-Budget speech by Finance Minister Willis implied continued fiscal pressures amid downward revisions to growth forecasts by the Treasury.
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A quantitative model for NZGB ASW spreads
NZ asset swap spreads (ASW) have exhibited distinct price action since the pandemic, compared with prior years. While spreads have historically exhibited mean-reverting behaviour with NZGBs trading at a premium (lower yield) to the respective swap yield, the post-Covid period has seen increased volatility, driven by supply dynamics, central bank interventions, and evolving risk sentiment, leading to a period of persistent deviation from the previous mean.
Growth trumps inflation
• The odds of a global recession are rising amid the significant escalation in trade tensions. The backdrop is fluid but risks for rates are skewed to the downside even after the recent large moves lower.
• We had a lower bias for rates ahead of the escalation and the market’s terminal OCR pricing now aligns with our 2.75% forecast. The RBNZ is expected to reduce the OCR by 25bp at its Policy Review this week and signal further easing ahead. Without a de-escalation in trade tensions, we expect the market to price an even lower terminal rate.
• The NZ yield curve, which is already elevated in a global context, is expected to steepen further as the RBNZ easing cycle proceeds.
• We have a positive view on duration further out the curve and expect 10Y NZGBs to retest the cycle lows from last year. The final significant supply event is complete for the 2024/25 fiscal year. NZGB swap spread spreads are expected to maintain a higher trading range.
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