View Summary:

Global bond markets traded a relatively narrow range last week which reflects the current trade-offs between aggressive policy valuations and pre-emptive yields versus uncertainty around the pace of easing cycles. In the absence of new catalysts, there is little to shift sentiment or accelerate momentum in either direction. With that in mind, the ISM and payrolls data are always central to the risk assessment and this week’s Fedspeak will also be parsed for evolving nuances on the policymaker reaction function.
Given this week’s data is more second tier, the domestic market is likely to take its sentiment and directional cues from global price action. The key market debate remains around just how much of a lag the RBA will have versus Fed policy, combined with the global search for yield. A buy the dip mentality, both domestically and globally will serve to cap the extent of bearish corrections.
NZ swap rates are at lows since May 2022, the 2yr at 3.57%, and could fall slightly further this week. That said, 3.50% is likely to be a near term floor given stretched pricing. The 2-10yr swap curve at +31bp earlier today was the steepest since June 2022. Since June this year, it has steeped by 84bp and is starting to look technically stretched. NZGB i-spreads remain around multi-year highs. Supply concerns, outright yield direction, and positioning all still weigh on NZGBs vs swaps.

This Week’s Highlights:

The June quarter saw ADIs purchase the most amount of ACGBs in four years.
We expect a slower pace of both ACGB and Semi purchases over the next 12-18 months.
Net cash outflows are the key to future LCR outcomes but are difficult to model.
The more confident ADIs become in their NCO assumptions, the lower the buffer.
Westpac’s flows suggest that the increase in ACGB demand has continued … and the slowdown in Semi purchases relative to recent history.
In NZ, the NZGBi 2025 is attractive to cash managers.
A new LGFA bond is expected and the RBNZ injects cash.

Read full report here

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