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NZGBS: Short-End Rally Steepens The Curve


As has become the norm this week, NZGBs fade U.S. Tsy-induced morning weakness to rally into the close with the short-end once again leading the reversal. By the close 2-year benchmark yields were 2bp lower, 5-year unchanged and 10-year yields 2bp higher.

  • The 4bp shift higher in the 2/10 cash curve brings the cumulative steepening this week to 17bp. While Cyclone Gabrielle may have had some impact on this week's short-end outperformance, it is more likely linked to moderation in the RBNZ’s 2-year measure of inflation expectations released earlier in the week.
  • Mirroring bonds, a subdued open for swap gave way to a short end led steepening of the curve with the 2-year rate closing down 5bp versus the 10-year rate’s rise of 2bp.
  • The positive shift in sentiment over the week was even more acutely visible in RBNZ-dated OIS with tightening priced for this month’s meeting dropping to ~45bp from 62bp and terminal OCR pricing dropping to ~5.31% from 5.50%.
  • With little on the local calendar until PPI data drops on Tuesday, the ongoing assessment of the social and economic costs of the recent floods and cyclone will continue to dominate locally after the weekend, with the latest RBNZ decision highlighting next week's calendar.

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