Interest rates drop might be further away

Global short-end interest rates drifted higher last week as a handful of G10 central banks lifted policy rates, most notably Norges Bank and the Bank of England with 50bp hikes.

Hawkish commentary by Fed chair Jerome Powell added to US rates, as did hawkish comments from ECB officials keen to stress the need for higher policy rates.

With the RBNZ dug in, having adopted what governor Adrian Orr dubs the “watch, worry and wait” phase, ANZ thinks the hurdle for OCR hikes in the next few months is high.

“If global central banks press on with hikes, and stress that cuts are a long way off, the risk is that local markets back away from pricing in deep cuts over the next 12-18 months – 87bps of cuts are priced in by next October,” says Sharon Zollner, ANZ chief economist.

“That, in turn, poses upside risks to short-end swap rates. Local long-end rates are at the upper end of trading ranges but haven’t broken new highs. Again, we see upside risks,” she says.

This week’s release of New Zealand Debt Management’s July tender schedule is expected to be a landmark event, offering more clues as to the likely weekly volume of issuance, and thus the implied likely number of New Zealand Government Bond syndications in the next fiscal year.

Zollner says bond supply remains a significant worry-point for market participants, and the next few months will be a litmus test.

“We think we will see four or possibly five syndications in 2023/24, and crucially, we expect them in July and August, with a full calendar, with the PREFU [pre-election economic and fiscal update], election, coalition negotiations and the HYEFU [half year economic and fiscal update] likely ruling out issuance between September and December inclusive.

“Such a front- loaded issuance profile poses upside risks to long-end yields,” she says.

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