NZ Bank Bill-OIS and FRA-OIS Spreads – An Update
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
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
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.
Trade Recommendation: Receive August RBNZ OIS
The market prices 2.5bps into the August RBNZ meeting (10% implied probability) and 11bps into the November RBNZ meeting (44% implied probability). Our base case, along with that of the RBNZ, is that the OCR will be on hold this year. We see the next move being a hike, in February 2019.
Outlook for Borrowers: Post Februarry MPS
At the February Monetary Policy Statement (MPS), the RBNZ kept the OCR on hold at 1.75%, as universally expected by economists. Interim Governor Grant Spencer said the next move in the OCR could be either up or down, but the Bank’s main scenario is that the next move is a tightening. Consistent with this, the Bank retained the same OCR projection as it had in November, which shows the first full rate rise in early 2020.
A Framework for Thinking About NZ-US Spreads
The spread between NZ and US rates has compressed to the tightest levels since the 1990s. The spread between 2 year NZ swaps and those in the US is now negative while the 10 year spread is around 50bps, some 60bps lower than the start of last year.
Interest Rate Strategy - Taking Stock After NZ CPI
New Zealand rates have moved higher over the past few months, mainly driven by rising global rates. Before the CPI release, the 5 year swap rate had moved to 2.78% and at the front end, the 2 year rate had reached a 3 month high of 2.27%. While NZ rates have been dragged higher by global forces, they still significantly outperformed the US.
Interest Rate Strategy: NZGB Yields To Go Higher This Year – Lighten Up On Duration
We expect NZGB yields to be pushed higher by USTs
New Zealand yields fell over the course of 2017 as the RBNZ kept the OCR at a record low of 1.75% and the initial sell-off after the US Presidential election in November 2016 unwound. NZ yields remain well off the levels seen in mid-2016 in the aftermath of Brexit, but are still reasonably near to their range lows. We expect NZGB yields to move higher, mainly driven by moves offshore in the first half of the year.