BONDS: NZGBS: NZ-US 10yr Back Closer To Fair Value Estimate, As Local Yields Up
NZGB yields have firmed as Thursday's Asia Pac session unfolded, outperforming a still soft US Tsy yield backdrop. The NZ-US 10yr spread is back to +3bps, up from flat levels and getting back closer to our fair value estimate around +6bps. The 2yr NZGB yield is near 2.52%, little changed today, with more shifts in the back end, the 10yr back to 3.96%, up almost 2bps. The NZ 2/10s curve is a touch steeper at +144.5bps, but off earlier Oct highs (+154bps).
- Spillover from the oil price bounce may a factor for higher NZGB yields today, although there isn't impacting US or Aust markets as much. As we noted the NZ-US spread widening is consistent with our fair value analysis.
- As we noted in our earlier update, since Monday's Q3 CPI update, NZ yields have struggled for further downside, as we await a fresh catalyst (technicals still point to lower yield levels). The 2yr swap rate is little changed today, last at 2.30%, just up from recent lows.
- BBG noted, as part of its consensus survey for NZ: "Economists expected New Zealand 3Q 2025 GDP at +1.0% y/y, the lowest forecast since survey’s inception;", although arguably this is already in the price from a rates perspective. The same survey noted economists cash rate to trough at 2.25% into 2026.
- Current market pricing has a tough around 2.09% for the Sep meeting next year (per OIS pricing).
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JAPAN: Koziumi Still Seen As Favorite For LDP Leadership Race
Earlier headlines crossed from Japan LDP leadership candidates. Notably from Takaichi we got, via Rtrs, :"JAPANESE PM CONTENDER TAKAICHI: WILL USE TAX REVENUES TO FUND TAX CUT, SPENDING FOR STEPS TO COMBAT RISING PRICES BUT IF NECESSARY, SHOULD ISSUE BONDS.
- This fits with Takaichi's known fiscal expansion viewpoint. Still, she sits well down per Polymarket odds, last around 28, off recent highs.
- Koizumi continues to lead, last at highs of 70 (since the LDP election was called a few weeks ago), see the chart below (Koizumi odds are the white line, Takaichi the orange line). Still, Takaichi remains the top pick among onshore opinions.
- Koizumi noted earlier: KOIZUMI: MUST BE MINDFUL OF NEED FOR FISCAL DISCIPLINE, BUT ACHIEVING SOLID ECONOMIC GROWTH IS BASIS FOR GUIDING SOUND FISCAL POLICY - [RTRS]"
- His remarks are more in line with a status quo fiscal outcome, although changes can't be ruled out.
- The JGBs 2/30s curve has flattened of late, last +225bps, we were around +245bps in early September. Nevertheless, the 2/30 curve remains near its steepest since 2005.
- The LDP election is scheduled for Oct 4.
Fig 1: Koizumi Clear Front Runner For LDP Leadership Race - Per Polymarket
Source: Polymarket/Bloomberg Finance L.P./MNI
AUSSIE BONDS: AU-US 10Y Diff In Top Half Of Range
Cash ACGBs are 2bps cheaper today.
- The AU-US 10-year yield differential is currently around +12bps, placing it in the top half of the ±30bps range that has persisted since November 2022.
- A simple regression of the 10-year yield differential against the AU-US 1-year forward 3-month swap rate (1Y3M) differential over the past two years suggests that the current spread is close to fair value.
- The 1Y3M differential, a key measure of expected relative policy paths over the next 12 months, has increased by approximately 60bps since June, reaching a level similar to October 2024.
Figure 1: AU-US Cash 10-Year Yield Differential (%)
Source: Bloomberg Finance LP / MNI
MNI EXCLUSIVE: A EU Business Leader In China Discusses Trade Relations
A European business leader in China discusses current trade relations between Brussels and Beijing On MNI Policy MainWire now, for more details please contact sales@marketnews.com.
