NZ BEIs – reasons to be positive as we look ahead in 2020
2019 should have been an especially challenging year for NZ breakevens (BEIs). The US-China trade war flared up and a broad-based global growth slowdown took hold. Government bond yields experienced a massive rally. BEIs fell to levels well below central bank inflation targets in most markets as market participants started to question the effectiveness of monetary policy in lifting inflation.
Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.
Safe As Houses: What does the increase to Housing NZ Ltd issuance mean?
Government increases Kāinga Ora borrowing protocol
Earlier this week, the government announced an increase to the borrowing protocol (effectively a debt limit) for Kāinga Ora – Homes and Communities. Kāinga Ora is responsible for housing and urban development, including the provision of state housing, which is a policy priority for the government. Housing New Zealand Limited (hereafter ‘Housing’) is a subsidiary of Kāinga Ora and funds under its own name in debt capital markets. The increase to the debt limit will allow Housing to fund greater investment in social housing.
Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.
The possibility of negative rates in NZ – an explainer
The RBNZ sets the Official Cash Rate (OCR). This is an overnight interest rate that banks earn on cash balances they hold with the RBNZ. The OCR is currently 1% - an historic low.
Bond market implications from HYEFU – fiscal stimulus inbound?
The Half-Year Economic and Fiscal Update (HYEFU) is next Wednesday, 11 December. Treasury will update its forecasts and economic assumptions and New Zealand Debt Management (NZDM) will provide an update on the NZGB bond programme. At the Budget in May, the bond programme was set at $10b for this fiscal year. Net issuance of nominal NZGBs was set to be positive in the current fiscal year for the first time since FY 2015/16.
Five reasons why NZ-US spreads can widen from here
NZ and US rates have experienced a major rally in 2019 but, through that all, the 10 year NZ-US spread has been relatively stable (Chart 1). The 10yr spread has broadly tracked expectations the OCR-Fed funds rate differential, which have mostly hovered between -50bps to -75bps.
BNZ RV Chart Pack
Swap-bond spreads appear to have found a base. Short-end NZGBs have outperformed on the ASW curve.
The NZGB 2027 is the cheapest bond on the curve. The 2033 has richened over the past fortnight and no longer stands out as cheap.
NZ BEIs have consolidated over the past fortnight. We think they are likely to face resistance ahead, unless the nominal sell-off gains momentum.
Long-end LGFA-NZGBs compress but remain within recent trading ranges.
Housing NZ bonds underperform noticeably.
Outlook for Borrowers: Post-November MPS
The RBNZ threw another significant surprise to financial markets yesterday, in keeping the OCR unchanged at 1%. Prior to the decision, the market had priced around a 75% chance of a rate cut, a view shared by a large majority of economists (ourselves included). There was a significant market reaction, with wholesale interest rates rising by up to 16bps and the NZD appreciating by 1%.
The beginning of the end? NZ long-end rates outlook
NZ longer-term rates hit record lows at the start of last month, with the 10 year swap reaching 1.1% and the 10 year NZGB yield briefly traded below 1%, before recovering over 30bps over the remainder of October. The massive decline in rates this year has been more a global story than a NZ-specific one (notwithstanding the RBNZ’s 50bp OCR cut in August). 10y NZ-US and NZ-AU spreads have been broadly range-bound this year (see Chart 1). In this note we recap recent developments and set out our medium-term outlook for the NZ long-end.
The two key drivers of NZ long-end rates are global rates, especially the US and Australia, and the RBNZ outlook.
BNZ RV Chart Pack
NZGBs have underperformed on a cross-market basis over the past fortnight as the market has pared back OCR expectations.
Swap-bond spreads appear to have found a base, albeit near multi-year lows. Short-end spreads have moved wider, as we had expected.
NZGB 2029s have cheapened vs. 2027s and 2033s. The 29s remain rich, albeit less so than before.
NZ 10y BEI makes new highs for the year as nominal bonds have sold off.
Modest widening in long-end LGFA-NZGB spreads ahead of tender tomorrow.