NZGBS: A Touch Cheaper, Impact Of Floods Eyed

Benchmark NZGB yields were ~2bp higher across the major benchmarks on Monday, as the space extended on Friday’s cheapening, even as JGBs firmed and U.S. Tsys ticked away from session cheaps.

• Swap rates were 2-5bp higher, leaving swap spreads flat to wider across the curve, suggesting that payside swap flow aided the cheapening in NZGBs, particularly given the timing of the moves.
• While it is easy to point to holiday-thinned markets (the Auckland area was closed), it is worth highlighting a domestic issue as a driver of the (still limited) price action. Heavy weekend rainfall and flooding in the Auckland region will no doubt exacerbate supply chain issues that are already well-documented, while creating some demand-pull price pressures as well. Could this impact the RBNZ’s Feb decision, even after Q4 CPI printed below the central bank’s assumptions? RBNZ dated OIS is currently showing ~60bp of tightening for the event, or just under a 50/50 chance of a 75bp step, little changed from late Friday levels, while terminal rate pricing continues to hover around 5.35%.
• The Q4 labour market report provides the domestic highlight of the week, with ANZ consumer confidence, building permits and CoreLogic house price data filling out the domestic docket at different points.