AUSSIE BONDS: Cheaper, No Steel/AL Tariff Exemption For Oz, US CPI Out Later

• Back in January the PBOC ended consecutive months of a bond buying program as the CGB10YR tipped 1.65%.
• Yields have continued to move lower since the peak in November 2020, moving in tandem with the slowing economy.
• From a peak of 3.36% in November 2020, bond yields consistently moved lower as the economy stumbled, and authorities were forced to implement a variety of stimulus measures to kick start growth.
• Back in November 2024 we asked the question as to where Chinese Government Bonds sat from a global fixed income asset allocation perspective.
• At that time, we considered Chinese Government Bonds relative to JGB’s noting “Historically, China government bonds have provided a significant yield pickup to other major bond markets, specifically Japan.  Whilst this pickup has decreased in recent years; as China’s inflation profile moderates and Japan moves away from the zero-interest rate policy; China’s yield is still double that of Japan.”
• In November the CGB 10YR yield was 2.08% and the JGB 10YR was 0.95% a yield differential of 1.13%. 

• Step forward to today, and the relationship between the two has changed dramatically with the CGB 10YR at 1.62% and the JGB 10YR at 1.31% - a yield differential of just 0.31%. 

   

  

• When the PBOC halted purchases, they cited a shortage of bonds to purchase in their open market operations and stated that they would re-instate purchases ‘at a proper time.”
• The bond purchase policy is part of the programs aimed at easing the monetary environment, specifically for regional governments as they refinance existing debt.  
• As some data shows signs of stability in the economy and hopes abound for a better year for housing, the key to authorities is to manage the bond market’s next move, especially when retail investors are heavily invested.
• Investors concerned about the malaise in property have invested heavily in the bond market and authorities would be worried about bubble like conditions, or damaging consumer sentiment were bond yields allowed to rise rapidly.
• As housing shows some signs of ‘green shoots’ – New House prices declines have improved for five consecutive months and Used House price decline improvements have improved for 3 months -  indicating that investor sentiment has likely bottomed following the various stimulus measures.
• Additionally, over the weekend China's January CPI y/y moved higher suggesting that the domestic economy may have found a bottom and that 2025 could present upside potential for the economy as stimulus measures' impact start to appear.
• This leaves authorities with a careful environment to manage bond yields with the path of least resistance being to keep yields steady.
• In that context when we consider the CGB vs JGB relationship, the anticipated tightening in CGB yields appears done for now as CGB yields have the potential to stay around these levels in the near term.  
• This presents the opportunity to return the CGB overweight to neutral, freeing up capital for other opportunities.  
• The Bank of Japan has recently raised rates to 0.50% and it is forecast that the terminal rate for the BOJ is 1.00%-1.50%.
• Data is supportive of that forecast with positives from wages growth and household expenditure.
• Equally the rhetoric from BOJ voting members (particularly the governor) remains hawkish, suggesting that the pathway for yields in Japan for now, likely remains higher.  
• With 39bps of hikes priced in currently, it seems possible that JGB yields could move higher from here leaving JGBs to be the main driver for this strategy at a time when CGB yields could do very little.  

NZGBs closed cheaper but at session bests, with benchmark yields 1-4bps higher. 

• The local calendar was empty today. The next event is a State of the Economy presentation by Treasury Chief Economic Adviser Dominick Stephens on Wednesday. The next data release is Card Spending on Thursday.
• Cash US tsys are ~1bp richer in today’s Asia-Pac session after Friday’s heavy post-payrolls session. Headlines have crossed from Bloomberg, with US President Trump stating that the US will announce tariffs of 25% on all steel and aluminium imports from Monday. Trump didn't announce a time when these tariffs will take effect.
• That aside, the focus this week is on Chairman Powell's mon-pol testimony to Congress on Tuesday-Wednesday, and CPI and PPI inflation measures on Wednesday and Thursday respectively.
• Swap rates closed 1bp lower to 5bps higher, with the 2s10s curve steeper.
• Markets are pricing in 48bps of easing for February, with a total of 120bps expected by November 2025.

The focus this week ahead of the February 19 RBNZ decision is likely to be January monthly prices, as they are higher frequency than their quarterly counterpart, and Q1 inflation expectations,.

• On Thursday, RBNZ inflation expectations for Q1 published. They have been trending lower over the last two years and are around the mid-point of the central bank’s 1-3% band. Both the 1- and 2-year measures were 2.1% for Q4.
• Thursday also sees January total and retail card spending. The RBNZ had eased monetary policy 125bp since August and the effects of this can be tentatively seen in monthly expenditure data as retail card spending rose 2.0% m/m in December to be up 0.6% y/y after a trough in June of -4.4% y/y.
• January food prices are out on Friday along with monthly rents, alcohol & tobacco, petrol, air transport and accommodation services. The components released account for around 45% of the CPI and will be the first indication of how Q1 inflation is developing (Q1 CPI released April 17).
• BusinessNZ’s manufacturing PMI for January prints on Friday. It has been sitting below the breakeven 50-level since February 2023 and was at 45.9 in December. The services version is released next Monday.
• Net migration for December is also published on Friday. Inward flows have been slowing and in November were 2070, although this number is likely to be revised significantly.