Forex Flash: NZ yields to mount in 2014 – BNZ

FXstreet.com (Barcelona) - According to the BNZ Research Team, “The recent action in NZ swaps should see 10-year spreads pushing at the top of the 0-40bps range by end of year, with spreads climbing to 60bps in 2014. Government bond supply is a key variable we see changing this year. The flattening of the curve is a key consideration for late this year and into 2014.”

However, 10-year spreads have already hit 60bps. “With spreads now breaking higher it is easy to get carried away – we would caution against hyperbole. In our view the dynamics are not in place for a return to 2007 type trading (i.e. 10-year at 100bps+ levels). Rather we believe an opportunity to position for tactical compression will arise. For those willing to bear the potential of a little short-term pain, the time may be now.” the team adds.

Supply issues continue to be a dominant theme in the NZGB market at present. Last week’s syndication of $NZ2b of the new NZGB2020 saw a book build, within the initial syndication price range, in excess of $NZ2.8b. Its issue yield of 3.15% was in line with the fair value implied by our Nelson Spiegel Svensson curve fitting model. The fact no significant yield premium occurred suggests strong demand in the backdrop of coincident NZGB coupon payments, maturing NZGB2013 bond and consequent index duration lengthening.