Interest Rate Strategy

Government Bond Supply And The Outlook For Swap Spreads

Nick Smyth -
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The Budget last Thursday sprung a few surprises in terms of the outlook for debt issuance (some of which the team outlined in Fiscally Sound But Risks Building). Some of the key headlines from a debt market perspective were...

The End Of The NZ Yield Premium Over AU?

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RBNZ-RBA policy rate spreads and expectations of policy action are a key driver of NZ-AU swap and bond spreads. Current market pricing is for both the RBA and RBNZ to remain on-hold for an extended period of time before slowly tightening. The AUD OIS curve is not fully priced for the first 25bp hike until August 2019, while the equivalent move isn’t priced into the NZD curve until September 2019.

Post-RBNZ Update: Steepeners And Linkers Look Even Better

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The headlines from the RBNZ were centred around the opening paragraph of the MPS, which stated the OCR “will” be on hold at 1.75% for “some time” – decisive language that reinforces the sense that rates likely aren’t going anywhere this year – and the explicit statement that the risk of the next move being a cut or a hike is equally balanced. See Clarity Defines Orr Debut for the team’s initial reaction to the MPS.

Outlook for Borrowers: Post May Monetary Policy Statement

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RBNZ Monetary Policy Outlook
The May Monetary Policy Statement, the first under new Governor Adrian Orr, delivered a similar message to previous statements. The key message was that the
OCR “will remain at 1.75 percent for some time to come”. The apparent decisiveness of the statement – “will remain” – suggests the hurdle for a move in either direction this year is very high. The RBNZ’s projections incorporate the full first rate rise in early-2020.

NZ Linkers Are Cheap; 2035 BEI Widener

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New Zealand inflation-indexed bonds, or linkers, offer the highest real yields in developed markets. The interpolated 10 year NZ real yield stands at around 1.55%, compared to around 0.8% on 10y US TIPS and Australian linkers, and negative real yields in Japan, Europe and the UK.

The US 2s10s Curve And The Risk Of Recession

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The flattening of the US yield curve over the past two months (to the flattest levels since 2007) has come to the forefront of attention among both market participants and central bankers. Last week, San Francisco Fed President John Williams noted that an inverted curve “is a powerful signal of recessions” while Dallas Fed President Robert Kaplan said last year that the yield curve would be a factor he would consider when deciding on interest rates (a flatter curve implied “a little less operating flexibility at the Fed”).

Trade Idea: NZ 1y1y 2y1y Steepener

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Global curves have flattened significantly over the past month and a half, with NZ being no exception. We highlighted two main risks when we recommended a 2s10s steepener in early March, namely a further rally in global rates and an intensification in funding pressures (FRA-OIS spreads) pushing up short-end swaps. As it transpired, both risks materialised, stopping us out of the position.

Interest Rate Strategy: LGFA 2022 Tender Preview

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The NZ Local Government Funding Agency (“LGFA”) has announced that it will issue a new 2.75% coupon, 14 April 2022 maturity bond next Wednesday. The 2022 will be the first bond on the LGFA to have a maturity (or coupon) that doesn’t match an NZGB.

Outlook for Borrowers: Post March OCR Review

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At the March OCR Review, the RBNZ kept the OCR on hold at 1.75%, as universally expected by economists. The Statement was largely a repeat of the version from February, with the Bank reiterating its expectation that growth should firm this year and inflation should eventually rise, after a dip in the coming quarters. The Bank finished by noting “numerous uncertainties” and reiterating a neutral policy stance. For reference, the last projections from the RBNZ in February had the first full rate hike in early-2020.

NZ Bank Bill-OIS and FRA-OIS Spreads – An Update

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USD 3 month Libor-OIS has risen sharply over recent months, from a low of around 10bps in November to above 50bps now. The increase in USD Libor-OIS appears to have been driven by...

Trade idea: 2s10s NZ steepener

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As we outlined earlier this year (see Taking Stock After NZ CPI), our bias is for a steeper NZ swaps curve in 2018. The primary rationale is that we see upside to UST yields from here and we expect the front-end of the NZ curve to remain anchored amid an unchanged OCR.

2029 NZGB Syndication RV

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The NZDMO is scheduled to syndicate a new 2029 maturity bond before the end of June. The exact timing of the syndication is unknown, but long-dated swap spreads have narrowed over recent weeks which may indicate the market is building-in some concession ahead of a potential announcement. 2027 and 2033 NZGB swap spreads are near their narrowest levels over the past 9 months.