BONDS: NZGBS: Mixed Close But Off Cheaps, Strong Demand Meets Supply

The issuance of 40-year bonds today was met with strong demand, with the actual high yield coming in notably below dealer expectations. According to a Bloomberg poll, the anticipated yield was 2.60%, compared to the realized yield of 2.57%.

• The auction’s cover ratio also improved, rising to 2.7518x from 2.2364x in the previous outing.
• As highlighted in the auction preview, today’s yield was approximately 15-20bps higher than November’s yet remained 10bps below the cyclical high of 2.815% reached earlier this month. Additionally, the 20/40-year yield curve had steepened by 5-10bps since the last auction, reaching its steepest level since at least 2008.
• The 40-year bond is 2-3bps richer from pre-auction levels in early afternoon trading.
• In early afternoon trading, the 40-year bond is trading 2-3bps richer than pre-auction levels.

• Expectations for Trump led volatility became real today as he hit the ground running, with suggestions that immediate tariffs on China may not be forthcoming.
• The benchmark 10YR future fell -0.125 in this morning’s trade to be at 108.98, marginally above the 20-day EMA of 108.96.  The 200-day EMA is 106.4948.
• Other EMA levels: 50-day EMA 108.2577, 100-day EMA 107.4111.  
• China’s 5YR future is down -0.065 today at 106.470 and 2YR future is down -0.022 to 102.802.
• The Lunar New Year holidays sees China out Jan 28-Feb 04 inclusive and it is likely that the Central Bank will provide liquidity leading into the holiday period which could see the resumption of the upward trend.
• Key data out this week: Industrial Profits Jan 27, PMI’s 27 Jan.   

USD/CNH spot is tracking near 7.2750 in latest dealings. Earlier highs were at 7.2939, which was above the 50-day EMA (near 7.2875), but we found selling interest on this move. CNH is around 0.15% weaker against the USD, roughly in line with BBDXY index gains of the same magnitude. 

• Market focus remains on Trump tariff risks. Earlier headlines around 25% tariffs on Canadian and Mexican imports from Feb 1, seeing broader USD sentiment surge. Trump appears willing to talk to China first, at least based off earlier headlines, although the tariff threat remains on the table.
• USD/JPY is weaker, back under 155.00 and close to session lows. US Tsy yields remain lower across the board, not reacting much to these latest tariff threats. This is likely helping curb USD/CNH upside.
• Spot USD/CNY is a little higher, but at 7.2750, remains comfortably off recent highs.
• CNY volumes have dominated the FX options space so far today. Per DTCC on BBG we have seen just under $1.7bn in volumes. Some of the larger transactions have been CNY calls, albeit at strikes above recent highs in spot (7.34-7.38 etc). CAD volumes are next largest at just under $750mn.
• USD/CNH risk reversals hold higher, but sub recent highs. The 1 week risk reversal last around -0.20, against recent highs just above flat. The 1 month is around -0.10.