Muted Reaction to Bank statements

Overall, the NZ market’s reaction to the US FOMC meeting and subsequent RBNZ meeting was relatively muted, says BNZ market strategist Kymberly Martin

Following the RBNZ statement (little changed), and in sympathy with the fall in US bond yields following the dovish FOMC meeting, NZ swap yields declined slightly. Yields closed the day around 5 bps lower, but volume continues to be extremely thin and liquidity non-existent.

2-year swaps now yield 2.81%, and the market continues to price a slight (20%) chance of a 25bps rate cut in the year ahead. However, there was certainly no hint of rate cuts in the RBNZ statement. In the near-term we believe 2-year rates will continue to be range bound within the 2.65%-2.90%.

With the Australian market closed yesterday, the NZ bond market was very quiet. Yields closed virtually unchanged. Another small DMO tender of 100m was announced for today, via GBNZ21s. With the fall in swap yields yesterday, 10-year swap-bond spreads narrowed by around 5bps to 23bps. This should help support demand at today’s auction. Also helping, is the fact NZ-US 10-year bond spreads have risen sharply in the past couple of sessions to 200bps, the top of recent ranges.

With relevance for future DMO bond issuance, P. M. Key said yesterday that, while slower global growth expectations are threatening to delay a return to fiscal surplus in New Zealand, the Government is still committed to achieving this by 2014/15. We will get precise numbers in the Budget Policy Statement on 16 Feb.

Overnight, US 10-year yields drifted off to yesterday’s post-Fed lows around 1.94%. Peripheral European yields mostly narrowed their spreads to “safe haven” German bonds. General buoyant sentiment in Europe followed the Fed commitment to keep rates ‘exceptionally low’ through to at least the end of 2014. The mood was also bolstered by a successful Italian bond auction. It saw €4.5 of 2014 notes auctioned at a 3.76% yield, down from 4.85% on Dec 28. Key to watch today will be the DMO bond auction at 2pm.

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