NZ yields follow offshore markets higher; more to come and expect curve steepening

Fixed Interest Markets by Kymberly Martin

NZ yields were up across the board yesterday. Overnight, offshore “safe haven” yields surged higher, as risk appetite soared after the announcement from EU ministers.

At yesterday morning’s RBNZ meeting the OCR was kept at 2.5%, as expected. While the statement was little different to the previous one, yields rose slightly after the announcement. The explicit reference to an intention to still hike rates at some point, perhaps took some market participants by surprise. Market expectations for rate hikes in the coming year have inched a little higher to 37bps.

Later in the day, headlines from the EU summit started to trickle out. This bolstered global market sentiment, pushing yields higher. 2-year swap yields rose by 7bps on the day, to 3.14%. 5-year swap yields rose 7bps to 3.95%. The 2s-10s curve remains around 156bps steep.

Similarly, bonds sold off, with yields rising 5-8bps. A DMO tender of $400m was announced for today, evenly spread across 17s, 19s, 21s and 23s. The yield on 13s closed up 8bps at 2.75%. The yield on 21s rose 5bps to 4.46%.

Overnight, as offshore markets absorbed the EU minister’s announcements, risk appetite surged higher. This was compounded by the Q3 US GDP release, that showed growth accelerated to 2.5%, from 1.3% in the previous quarter. US 10-year yields rose from 2.2% to 2.35%, their highest level since early August.

German equivalents rose from 2.0% to 2.2%. CDS spreads (the market price to insure against default) for peripheral European countries dropped sharply lower.

Expect NZ yields to have another leg higher on the back of moves seen overnight. It is likely we will see a curve steepening bias, as long-end yields follow their offshore counterparts higher.

See our interactive bond rate charts here.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.