The $81 billion New Zealand Government bond market is bracing for a fiscal stimulus package, with yields on some Government maturities exceeding their equivalent swap rates on the prospect of a big lift in bond issuance to fund it.
In the swaps market - where banks and corporates raise funds - bonds usually trade at a premium to their equivalent Government bonds, reflecting relatively higher risk.
But for some longer dated Government securities, the relativity reversed over the last week.
Government 2037 bonds last traded at 1.64 per cent in yield compared to the 15 year rate of 1.24 per cent.
The 2031 Government bonds traded yesterday at 1.05 per cent compared with the equivalent swap rate of 1.03 per cent - compared with the normal 20 basis point premium.
Talk in the market was that Finance Minister Grant Robertson would unveil a $12b "shock and awe" fiscal stimulus package at today's announcement, scheduled for 2pm.
"The market is assuming that the Government is going to unveil a significant fiscal stimulus and that's going to involve quite a large issuance of Government bonds, which is going to push up those yields," ASB senior economist Mark Smith said.
"That's very unusual, because normally swap yields trade at a premium to Government bonds," he said.
Financial markets expect to see some more "front footing" of fiscal stimulus and a more bond issuance, predominantly through the longer dated tenors, he said.
"They are already anticipating an aggressive stepping up of issuance to fund the fiscal package.
"Ordinarily, with an event such of this (coronavirus outbreak), you would expect a lot more safety in terms of a Government bond holdings, but because we are expecting a significant increase in issuance. That is certainly offsetting that," Smith said.
"The increased supply factors are outweighing any other kind of risk aversion-type behaviour," he said.
The market's view of the outbreak had completely changed.
"I suppose the view a month or two ago was that it would be a short, sharp shock.
"The thinking is very different from that now. There is a lot more fear coming into the markets."
One strategist said the market was "flabbergasted" last week when the bond market started to buckle.
Reserve Bank Governor Adrian Orr, in an emergency move, slashed the official cash rate (OCR) by 75 basis points to 0.25 per cent yesterday morning.
The financial markets now see 0.25 per cent as the new floor for the OCR.
If that doesn't prove enough, then Government bond purchases by the Reserve Bank would be a next cab off the rank, Smith said.