Interest Rate Strategy

An Update On NZ Funding Pressures (Or Lack Thereof)

Nick Smyth -
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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

Nick Smyth -
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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.

The Neutral OCR Could Be Below 3.5% - Implications For NZ Rates

Nick Smyth -
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The neutral cash rate can be thought of as the level of the OCR that is neither stimulatory nor contractionary for the economy. In an idealized world, when the OCR is at neutral, growth should be about trend, the output gap zero and inflation stable at target.

Housing New Zealand Limited (HNZL) – A New High Grade Issuer

Nick Smyth -
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Housing New Zealand Corporation (HNZC) is responsible for the provision of state housing in New Zealand. It currently owns or manages 63,000 properties across the country.

Government Bond Supply And The Outlook For Swap Spreads

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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?

Nick Smyth -
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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

Nick Smyth -
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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

Nick Smyth -
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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

Nick Smyth -
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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

Nick Smyth -
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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”).