ASIA STOCKS: Kospi Slumps Over 3%, China Vows To Curb Disorderly Competition

NZGBs are richer today, with benchmark yields 2bps lower. The NZGB 10-year has slightly outperformed US 10-year since yesterday’s close, with the NZ-US yield differentials 2bps tighter on the day. 

• At +25bps, the NZ-US 10-year differential is in the top half of the -20bp to +40bps range seen this year.
• A simple regression analysis of the 3-month forward swap rate spread (1Y3M) over the past 18 months indicates the 10-year yield differential is around 7bps below its estimated fair value of +32bps.
• Notably, the regression error has fluctuated within a range of ±15bps over the past year, highlighting some variability in the relationship​.
• The 1Y3M differential continues to be a key driver of market expectations for long-term yield convergence.

Figure 1: NZ-US 10-Year Yield Differential

 Source: Bloomberg Finance LP / MNI

• China's bond futures rallied in the morning session as the Central Bank withdrew liquidity during the OMO.  
• The 10yr future is up +.10 to 109.08, following on from yesterday's rally.  The move sees the 10yr trade above the 20-day EMA of 108.99.  
• The 2yr future +0.02 to 102.50 to trade through the 20-day EMA of 102.49 and approach the 50-day EMA of 102.51
• The 10YR government bond is lower in yield by -0.05bps at 1.64%

In early afternoon trade, JGB futures weaker, -5 compared to the settlement levels, after reversing modest overnight gains.

• Japan’s monetary base fell 3.5 percent in June from a year ago.
• Japan’s super-long bonds are set to remain under pressure in the medium term as local life insurers may offload holdings to sidestep impairment losses on deeply discounted debt. (per BBG)
• (Bloomberg) -- Japan will continue actively negotiating tariffs in good faith with the US for both countries’ mutual benefit, Deputy Chief Cabinet Secretary Kazuhiko Aoki says at a regular press conference on Wednesday.
• Cash US tsys are little changed in today's Asia-Pac session after yesterday's twist-flattener. Wednesday's US data focus is on MBA Mortgage Applications at 0700ET, Challenger Jobs at 0730ET followed by ADP Employment Change at 0815ET. No Fed scheduled Fed speakers. Thursday is a heavy data day with NFP added due to Independence Day holiday closure on Friday.
• Cash JGBs are little changed across benchmarks out to the 10-year and ~1bp richer beyond. The benchmark 10-year yield is 0.5bp higher at 1.40% versus the cycle high of 1.596%.
• The swaps curve has twist-steepened, with rates 1bp lower to 1bp higher. Swap spreads are tighter out the 10-year and wider beyond.