BONDS: NZGBS: Closed Richer, Risk-Off, Cons Conf Off Lows But HH Exp Subdued

The AU-US 10-year cash yield differential sits at -15bps following today’s Q4 CPI data, firmly in the lower half of the ±30bps range that has largely held since November 2022.

• A simple regression of the AU-US 10-year yield differential against the AU-US 1-year forward 3-month swap rate (1Y3M) differential over the past year suggests the current 10-year yield spread is near fair value, estimated at -13bps.
• The 1Y3M differential, a key proxy for anticipated relative policy trajectories over the next 12 months, has traded within a relatively narrow range this year. However, it remains approximately 85bps lower than its mid-September level, having declined from +55bps to -30bps. 

Figure 1: AU-US Cash 10-Year Yield Differential (%)

Source: MNI – Market News / Bloomberg

RBA-dated OIS pricing is 4-9bps softer across meetings after today’s Q4 CPI data, with August leading. 

• Q4 CPI measures printed 0.1pp below consensus with underlying measures trending towards the top of the RBA’s 2-3% band but still “some way” from the 2.5% mid-point. The data should increase the RBA’s “confidence that inflation is moving sustainably towards target” as annual rates printed 0.2pp below its November forecasts. There will be updated projections at its February 18 meeting and the timing of 2.5% trimmed mean inflation will be important for its decision.
• A 25bp rate cut is more than fully priced for April (135%), with the probability of a February cut at 91% (based on an effective cash rate of 4.34%). February was at 76% before the data. 

Figure 1: RBA-Dated OIS – Post-CPI Vs. Pre-CPI

Source: MNI – Market News / Bloomberg

• It has been a quiet session so far for tsys, futures are all trading higher however ranges have been narrow. TU is +01 at 102-29⅜, while TY is +06 at 109-07.
• The medium-term trend remains bearish, however a bullish short-term cycle highlights a corrective phase and the TY contract is holding on to its recent gains. Attention is on 109-12+, the 50-day EMA - a level tested on Monday. A clear break of this EMA would strengthen a bullish theme and open 109-31, the Dec 18 high. The bear trigger is 107-06, the Jan 13 low. Initial support has been defined at 108-00, the Jan 16 low.
• Cash tsys yields are 1-2bps lower today, the belly is outperforming again, with the 7yr -1.6bps at 4.409%, while the 10yr is -1.2bps at 4.520%.
• Projected rate cuts through mid-2025 have eased vs. late Monday (*) levels as follows: Jan'25 at -0.1bp (-0.7bp), Mar'25 at -7.8bp (-8.3bp), May'25 at -15.4bp (-15.9bp), Jun'25 at -26.5bp (-27.9bp), Jul'25 at -32.1bp (-33.7bp).
• The Fed is expected to hold rates steady at 4.25%-4.5% this week, following three consecutive rate cuts since September. Policymakers aim to assess the impact of persistent inflation and President Trump’s bold economic policies on trade, taxation, and regulation. Powell will likely face questions about Trump’s influence on monetary policy, the “neutral rate,” and conditions for future rate changes. While inflation progress has stalled, December data offered some relief, and the Fed plans to retain flexibility for adjustments as needed. Powell’s press conference is set for Wednesday afternoon.