Imre Speizer, Research Analyst at Westpac, expects Friday’s tender of $100m inflation-indexed 2035 NZGBs to attract investors given falling yields and historically low BEIs. Key Quotes “Real Yields: NZGB 2035 RY continues to broadly follow nominal yield direction, and has fallen to an important level of previous support at 2.22%. This is partly due to NZ yields falling in expectation of RBNZ easing and partly due to global yields falling in expectation of further easing in Japan, Europe and other regions. Technically, 2035 RY is sitting right on a head-andshoulders neckline, a break implying a further large fall in yields. Break Even Inflation (BEI): NZ BEIs have trended downwards ever since the oldest linker (the 2025) was issued in 2012. The 2035 has a shorter history, but has conformed to the general trend. That trend is showing signs of ending but there have been periods in the past which proved to be false ends so caution is warranted. At 1.13%, the 2035 BEI is cheap when judged against CPI inflation forecasts (the RBNZ’s and ours), as well as against the RBNZ’s inflation target mid-point of 2.0%. International Relative Value: NZ real yields remain well above those of comparable global peers, even though it has outperformed similar bonds in the US and Australia during the past few months. Global relative value investors should still find current spreads attractive, particularly given the weight of quantitative easing likely to come from the ECB and BoJ. NZ BEI has trended lower in line with global BEIs, particularly those in the US. It is instructive that US BEIs have recently started to reverse higher, following evidence of rising inflation there. We expect NZ BEIs to eventually follow suit to some extent. Inflation: We expect NZ CPI inflation for the March 2016 quarter to be -0.1% (0.2% yoy), but to rise to around 1.0% yoy by year end. This rise should result from the RBNZ’s continued easing cycle which will take the OCR to 2.0% by mid-2016.” For more information, read our latest forex news.