Trade Idea: NZ-US 5y5y Widener
NZ-US spreads have tightened aggressively across the curve over the past 12 months. The NZ-US 1y1y spread has declined from +60bps to -105bps, as Fed tightening expectations have increased and RBNZ rate cut expectations have built. Longer-dated NZ-US forward spreads have also tightened aggressively. The NZ-US 5y5y spread has tightened almost 100bps over the past 12 months, to near record tight levels – see Chart 1.
NZ Curve Outlook: Are We Near A Point Of Inflection?
The RBNZ August MPS, the accompanying comments from Governor Adrian Orr in the press conference, and then the subsequent interview Assistant Governor John McDermott gave to Bloomberg were taken by the market as dovish. McDermott said the RBNZ had been pushed “closer to the trigger point” of rate cuts and said that he wanted the market to understand that hikes were off the table for the foreseeable future. Taken at face value, this implies a clear asymmetry around the OCR outlook over the coming year and, reflecting this, the market now prices 7.5bps of cuts by mid-2019
NZ Linkers Post-RBNZ: Better Fundamentals And Very Cheap
In early May, we entered a NZ breakeven inflation (BEI) widener position, buying the 2035 NZ linker and selling the 2037 nominal NZGB at 146bps. Our rationale for the trade was based on our expectation that annual NZ CPI inflation would move to 2% this year and this should ultimately be reflected in wider breakevens. Furthermore, with breakeven inflation below most measures of core inflation, we believed the position provided a ‘buffer’, or margin of error, in case our inflation forecasts were too high.
Outlook for Borrowers: Post-August MPS
How Long Will The NZ 10 Year Remain Decoupled From The US?
The US 10 year Treasury yield has increased almost 100bps from the local trough reached last September. Over that same period, the NZ 10y swap rate is unchanged – see Chart 1. NZ is not alone; Australian, European and Swedish swap rates have barely increased over that same period.
Trade Idea: Buy LGFA 2023 vs. NZGB 2023
Intermediate maturity LGFA-NZGB spreads have widened over the past two months. The constant maturity 5 year LGFA-NZGB spread reached the widest levels since early 2017 last week, although it has since retraced some of that move – see chart 1.
An Update On NZ Funding Pressures (Or Lack Thereof)
NZ BKBM-OIS has retraced from a peak of 31bps in late April to almost 20bps currently. In contrast, Australian 3m BBSW-OIS is 54bps and remains at historically elevated levels. The divergence between NZ and Australian bills-OIS has raised some questions among market participants around the respective drivers of the two markets.
Trade Idea: Receive November 2018 OIS
The RBNZ OCR Review contained a less firm commitment to keeping rates on hold. The Statement said that the RBNZ sees the OCR on hold “for now”; in the May MPS the wording used was “for some time”. Additionally, the RBNZ removed the reference to an equal balance between the risk of a rate cut and rate hike.