NZGBS: Terminal Rate Shift, Supply Burden & Orr Comments Weigh

The early cheapening impulse has extended, as the market continues to digest yesterday’s RBNZ meeting and subsequent Bank communique. Cash NZGBs run ~12bp cheaper across the curve, while swap rates are 7-10bp higher as that curve steepens a touch and swap spreads tighten. Swap spread tightening may be aided by the presence of increased NZGB issuance needs surrounding the natural disasters that have hit NZ (ultimate cost unknown), most recently reflected by the earlier than expected syndication of the new NZGB May-30 line (announced yesterday for the month of March).

• Elsewhere, this morning saw RBNZ Governor Orr stress the potential for higher for longer interest rates in an interview with BBG.
• Market pricing of the terminal OCR is moving towards the RBNZ’s view today (RBNZ-dated OIS showing a terminal OCR ~5.45% vs. the RBNZ’s expectation of 5.50%) after little movement in the strip in the wake of yesterday’s decision. Orr’s latest comments and the lack of revisions to the peak in the Bank’s OCR track are beginning to hit home. This will be adding pressure to NZGBS.
• This week’s NZGB supply cleared smoothly, seeing cover of 1.4-2.5x across the 3 lines.