NZGBS: Yields Sharply Higher, Stimulatory Budget, Increased Borrowings

NZGBs closed sharply cheaper with 2-year and 10-year benchmark yields respectively 17bp and 9bp higher after the NZ Treasury says the budget is stimulatory and so rates will stay “higher for longer”.

• An expansionary budget in an already capacity-constrained economy is likely to concern the RBNZ. RBNZ dated OIS closed 8-18bp firmer for meetings beyond May. 31bp of tightening is priced for next week’s meeting.
• The FY23 deficit is forecast to be considerably larger than predicted in December by $3.4bn or 0.9pp. FY24 deficit is to widen to $7.6bn or 1.8% of GDP. The return to surplus has been delayed a year to 2026 (0.1% of GDP) due to repair costs from recent extreme weather. The debt ratio should peak at 22% in FY24.
• The forecast 2023/24 NZ Government Bond programme has been increased to NZ$34 billion, NZ$4 billion higher than that published at the Half Year Economic and Fiscal Update 2022. The forecast NZGB programmes for 2024/25, 2025/26, and 2026/27 have all been increased, by NZ$2 billion, NZ$10 billion and NZ$4 billion respectively.
• Swap rates closed 10-17bp higher with the 2s10s curve 7bp flatter and implied swap spreads sharply narrower.
• The local calendar sees the release of April trade data tomorrow.