AUSSIE BONDS: Richer With Risk-Off Sentiment, Q4 GDP Partials On Monday

NZGBs ended the session at their strongest levels, 1-2bps richer, supported by a post-CPI spillover from ACGBs. ACGBs gained 6-8bps after Australia's Q4 CPI came in slightly below market expectations, reinforcing the likelihood of an RBA rate cut on February 18.

• The local market was slightly cheaper before the Australian CPI release, with key domestic drivers being Finance Minister Willis' appearance at a parliamentary select committee hearing and a speech from RBNZ Chief Economist Paul Conway.
• Conway noted that easing domestic pricing intentions and the recent drop in inflation expectations pave the way for further easing, as outlined in the November Monetary Policy Statement. However, he cautioned that given ongoing uncertainty, the RBNZ will need to "feel our way" as the OCR approaches neutral.
• Swap rates closed 2-3bps lower.
• RBNZ dated OIS pricing closed flat to 5bps softer across meetings, with November 2025 leading. 48bps of easing is priced for February, with a cumulative 117bps by November 2025.
• The local calendar will see Trade Balance and ANZ Business Confidence data tomorrow.
• Tomorrow, the NZ Treasury plans to sell NZ$200mn of the 1.50% May-31 bond, NZ$200mn of the 4.25% May-36 bond and NZ$100mn of the 1.75% May-41 bond.

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