BONDS: NZGBS: Cheaper With US Tsys On Signs On Tariff Impact In CPI

ACGBs (YM -3.0 & XM -7.5) are weaker with a steeper curve after US tsys finished Friday, cheaper despite evidence that the conflict between Israel and Iran is escalating.

• Israel struck over 200 targets in Iran, including nuclear facilities, killing several military commanders. 
• In early Monday trade, the knee-jerk reaction in major asset classes has been risk-off (ex-weaker yen), with a focus on oil prices. US tsy futures are little changed.
• The latest UofM sentiment came out higher than expected on Friday, 1Y inflation much lower than expected (5-10Y in-line).
• Aside from geopolitical risks, markets await the FOMC policy announcement on Wednesday.
• Cash ACGBs are 4-6bps cheaper with the AU-US 10-year yield differential
• The bills strip has cheapened, with pricing -2 to -6.
• RBA-dated OIS pricing is firmer across meetings today. A 25bp rate cut in July is given an 83% probability, with a cumulative 78bps of easing priced by year-end.
• Today, the local calendar will be empty.
• The AOFM plans to sell A$300mn of the 4.75% 21 June 2054 bond on Tuesday, A$900mn of the 2.75% 21 June 2035 bond on Wednesday and A$800mn of the 1.00% 21 December 2030 bond on Friday.

The overnight range was 143.39 - 144.48, Asia is currently trading around 144.50. USD/JPY’s test lower fails again as US yields bounce, responding to the higher oil price and the S&P somehow closes back above 6000. If this conflict extends as has been articulated by Israel can equities continue to hold up ?  

• MNI SECURITY: Israel's Operation Against Iran Could Last Two-Three Weeks - Ynet. Israel's Ynet reports that Israeli officials estimate fighting with Iran, "could stretch for two to three weeks, with more strikes on tap." Ynet notes that Israeli Prime Minister Benjamin Netanyahu, "is expected to speak on Friday with U.S. President Donald Trump 
• (Bloomberg) - “The direction of crude oil -- which is set to open sharply higher Monday -- will be the guidepost for longer-dated Treasury yields in the near-term. With fears of a bigger conflict between Israel and Iran and oil traders bracing for the turmoil to imperil supply, bond yields are likely to go higher.”
• USD/JPY held its support back towards the 142.00 area once more, with oil surging again and US yields bouncing this pair has drifted back to the middle of its recent range.
• Price is back in its recent 142.00 - 147.00 range and will need a break either side of that to get a clearer direction. The larger interest around 145.00 looks to be rolling off tonight.
• The market still seems very confident of a move lower in USD/JPY but with positioning quite large now we have seen the risk of pullbacks increase. A break above 147.00 would be needed to challenge the conviction of any shorts.
• Options : Close significant option expiries for NY cut, based on DTCC data: 145.00($4.87b). Upcoming Close Strikes : 143.00($692m June 18).

• CFTC data shows Asset managers maintained their already extensive JPY longs, leveraged funds looked to have pared back their own longs once more.

  Fig 1 : JPY CFTC Data

  

  Source: MNI - Market News/Bloomberg Finance L.P

In local morning trade, NZGBs are 2-3bps cheaper after US tsys finished last week on a weak note despite evidence that the conflict between Israel and Iran is escalating. 

• In early Monday trade, the knee-jerk reaction in major asset classes has been risk-off (ex-weaker yen), with a focus on spillover from oil prices. For the oil benchmarks, we sit off session highs. That said, both benchmarks are still up over 2%, as Israel started targeting Iran's energy facilities.
• US tsy futures are little changed.
• Headlines have crossed from US President Trump, stating he continues to support Israel, noting: "TRUMP SAYS HE HOPES THERE WILL BE A DEAL BETWEEN IRAN AND ISRAEL, BUT SOMETIMES YOU HAVE TO FIGHT IT OUT - [RTRS]"
• NZ’s Performance of Services Index fell to 44 in May from a revised 48.1 in April. The PMI and PSI readings “are consistent with the economy returning to recession”, BNZ senior economist Doug Steel. “We’re a long way from forecasting this, but the data are a reminder of just how vulnerable the economy currently is.” (per BBG)
• Swap rates are flat to 2bps higher.
• RBNZ dated OIS pricing is little changed across meetings. 4bps of easing is priced for July, with a cumulative 30bps by November 2025.