BONDS: NZ-US 10Y Differential Remains Near Lowest Since Mid-2021
NZGBs are currently showing a bull-steepener, with benchmark yields flat to 2bps lower. The NZGB 10-year is slightly outperforming its $-bloc counterparts, with the NZ-US and NZ-AU yield differentials 1-2bps tighter on the day.
- At +2bps, the NZ-US 10-year differential remains around its lowest since mid-2021.
- 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 5bps above its estimated fair value of -3bps.
- 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: MNI – Market News / Bloomberg
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US TSYS: Strong Jobs & Unemployment Rate Dip Dashes Rate Cut Hopes
- Treasuries gapped lower after Friday morning's larger than expected December non-farm and private payroll gains while unemployment dipped slightly.
- The 256k in December leaves a strong recent trend, with 255k in Sep, an average of 128k for those two months (initially 132k) before surprisingly reaccelerating again. Unemployment rate: 4.086% in Dec after very small downward revisions in the prior two months, with 4.23% in Nov (initially 4.246%) and 4.14% in Oct (initially 4.15%).
- The Dec'24 10Y contract traded down to 107-12 low (-27) well through technical support of 107-19.5 (1.618 proj of the Oct 1 - 14 - 16 price swing) next level: 107-04 (Low Apr 25 ‘24 and a key support). Curves bear flattened but finished off lows, 2s10s -3.937 at 38.383 vs. 36.572 low, 5s30s -9.612 at 37.484. 10Y yield taps 4.7860 - highest since May 2022.
- Futures retreated towards post data lows late in the session while projected rate cuts through mid-2025 have retreated since this morning's data, current vs. morning levels* as follows: Jan'25 at -0.7bp (-1.7bp), Mar'25 -6.3bp (-10.1bp), May'25 -10.5bp (-15.9bp), Jun'25 -18.2bp (-25.6bp), Jul'25 -20.2bp (25.5bp).
- Next week brings CPI and PPI inflation measures on Wednesday and Thursday respectively, the scheduled Fed speaker docket rather muted with the Fed Blackout next Friday.
US TSYS: Lat eSOFR/Treasury Option Roundup: Heavy SOFR Puts
Heavy option volumes reported Friday, SOFR outpacing Treasury flows with the former leaning towards downside puts as underlying futures retreated towards post data lows late in the session. Projected rate cuts through mid-2025 have retreated since this morning's data, current vs. morning levels* as follows: Jan'25 at -0.7bp (-1.7bp), Mar'25 -6.3bp (-10.1bp), May'25 -10.5bp (-15.9bp), Jun'25 -18.2bp (-25.6bp), Jul'25 -20.2bp (25.5bp).
- SOFR Options
- Block, 9,000 SFRM5 95.62/95.75 put spds, 6.0 ref 95.84
- +20,000 0QK5 95.25/95.50 put spds 1.0-1.25 over 96.00/96.12 call spds
- Block, +6,400 SFRZ5 97.00/98.00 call spds, 8.0 vs. 95.925/0.12%
- +8,000 0QM5/0QU5 94.50/95.00 put spd strip 9.75 total
- +5,000 0QM5 94.00/94.50/95.00 put flys, 2.5 vs. 95.87/0.05%
- +10,000 SFRZ5 95.25/95.75 2x1 put spds, 3.25 ref 95.915
- +6,000 SFRM5 96.00/96.25 call spds, 4.5 ref 95.845
- -5,000 SFRZ5 96.56 calls, 18.5 ref 95.905
- -6,000 0QM5 95.75 puts cvrd vs 2QM5/3QM5 95.75 put strip cvrd, 10.5 net puts over
- +20,000 0QM5 96.37/97.00 call spds vs 95.37/95.62 put spd, 3.0 net calls over
- -10,000 0QG5 96.00 calls, 12.0 ref 95.95
- -20,000 0QH5 96.62 calls, 3.0
- +7,000 0QZ5 97.25 calls, 9.5 vs. 95.87/0.14%
- +10,000 SFRJ5 96.50 calls, 2.75 ref 95.855
- -5,000 SRM5 96.00/96.25 call spds, 4.5 ref 95.845
- -8,000 SFRJ5 95.75 puts, 7.0 ref 95.84
- -10,000 SFRG5 95.68 puts, 1.5 ref 95.75
- +5,000 SFRU5 96.50/97.00 call spds 5.0 ref 95.88
- +10,000 SFRK5 96.50/96.75/97.00/97.25 call condors, 1.00 ref 95.91
- Block, 5,000 SFRZ5 95.25/95.75 2x1 put spds, 3.0 net ref 95.935
- 5,000 SFRM5 96.06/96.18 call spd vs. 0QM5 96.25/96.37 call spd
- 10,000 SFRF5 95.87 calls, cab
- 2,000 0QG5 95.81/95.87/95.93 put flys ref 96.02
- Block/screen, 10,000 2QH5 95.00/95.50 put spds, 4.0 vs. 95.94/0.15%
- +3,000 SFRH5 95.875/96.1875 call spd 3.25, ref 95.795
- 1,500 SFRK5 95.75/95.87/96.00 put flys ref 95.92
- Blocks, +10,000 SFRM5 95.75/95.9375/96.1875/96.375 call condor, 5.0 vs. 95.90/0.10%
- Blocks, +18,966 SFRJ5 96.125/96.3125/96.5625/96.75 call condor, 2.50 ref 95.93
- Treasury Options
- 10,000 TYG5 107.5/108.25 call spds 27 ref 107-24
- 4,000 TYG5 104.25/105.75 put spds ref 107-21
- -10,000 TYG5 106/106.5 put strips, 14
- 4,000 Monday wkly TY 107/107.25 put spds ref 108-03 (expire Monday)
- over -19,500 wk2 TY 107.5 puts, 4-5 (expire today, OI 39,662)
- 2,000 TYH5 106/108 2x1 put spd vs. 108.5/111 1x2 call spds ref 108-08.5
- 3,150 TYH5 111/113 1x2 call spds ref 108-02.5
- 2,000 TYG5 109.5/110.5/111.5 call flys ref 108-04.5
- +13,000 TYH 106.5/107.5 2x1 put spd, 4 ref 108-05 (106.5 strike appr 4.95%)
- 3,500 TYG5 108/109.5 put spds, ref 108-05
- 5,000 TYG5 106.5/107.5 put spds, ref 108-05
JGB TECHS: (H5) Downtrend Extends
- RES 3: 147.74 - High Jan 15 and bull trigger (cont)
- RES 2: 146.53 - High Aug 6
- RES 1: 142.73/144.48 - High Dec 9 / High Nov 11
- PRICE: 140.58 @ 19:10 GMT Jan 10
- SUP 1: 140.54 - 2.236 proj of the Aug 6 - Sep 3 - 9 price swing
- SUP 2: 140-00 - Round number support
- SUP 3: 139.38 - 2.764 proj of the Aug 6 - Sep 3 - 9 price swing
A clear downtrend in JGB futures remains intact and the latest fresh cycle lows, reinforces this condition. Note too that moving average studies on the continuation chart are in a bear-mode setup, highlighting a clear downtrend. The move down exposes the 140.00 psychological handle next. For bulls, a reversal would open 142.73 and 144.48, the Dec 9 and Nov 11 high respectively.
