Rates Strategist: NZ curve steepening overextended short term
• The NZ economy remains an outlier with very weak activity and inflation back at target. The RBNZ is expected to follow up its 50bp cut with a similar magnitude adjustment in November. A 75bp cut is being debated by market participants, and is partially priced, but is unlikely from our perspective.
• The back-up in global yields, related to US election uncertainty and a paring of Fed rate cuts, is creating value in NZGBs. Real yields are approaching the levels from late 2023 and cyclical signals are also supportive for duration.
• The NZ yield curve has bear-steepened, with 2y/10y trading to a fresh cycle high above 50bp. The recent steepening is showing signs of overshooting, both on an outright basis, and relative to comparison US and Australian curves.
• NZGBs are screening positively on a cross-market basis, contributing to a narrowing in spreads.
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Rates Strategist: NZGB swap spreads near historic low
• Despite the positive price and cyclical signals from our objective duration framework, the extent of central bank easing already embedded in the curve makes us cautious about extrapolating recent moves lower, particularly at the longer end of the curve. We have a neutral view on duration and expect 10-year NZGBs to consolidate near 4%.
• NZGBs have continued to underperform relative to swaps and are approaching historic lows. Swap spreads represent medium term value, but a durable reversal will likely require a decrease in the government’s funding requirements. A pause or slowing of the pace of RBNZ QT could alter the trajectory for swap spreads.
• The 10y/30y NZGB curve steepening above 60bps appears to be an overshoot, relative to comparison markets and 10-year NZGB yield levels, with market technical indicators pointing towards a lack of investor demand for the ultras.
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