Fixed Interest Markets by Kymberly Martin
There was a harsh decline in NZ yields yesterday, reflecting the previous day’s falls offshore and collapse in risk sentiment. The NZ DMO auction saw very strong demand. Overnight, offshore “safe haven” yields crept higher as the market caught its breath.
The NZ swap curve fell sharply by 11-12bps across the curve yesterday. 2 to 7-year swap yields are now at levels some way below early 2009 lows, at the depth of the global financial crisis. The short-end of the curve has moved to eliminate all but 15bps of hikes from the RBNZ in the year ahead. Given the Bank's stated tightening bias, the market is reluctant, in the absence of a specific catalyst, to price rate cuts from the RBNZ. If European issues drag on, we believe the RBNZ is more likely to stay on hold for longer, as opposed to cutting rates. 2-year swap yields closed at an historic low of 2.95%. The 10-year yields closed at 4.44%, maintaining the 2s-10s slope at close to 150bps.
NZ bond yields opened about 10bps lower yesterday and drifted a little lower ahead of the mid-afternoon DMO auction. The auction attracted strong interest for the relatively small offering. 50m of 19s were 6.5x bid, while 50m of 21s and 23s saw over a 2.5x bid-to-cover ratio. Successful bids were 3bps below the market, which then held for the rest of the afternoon. The yield on GBNZ 13s closed 12bps lower at 2.62%. 17s and 21s closed down 14bps at 3.76% and 4.20% respectively. This takes NZ 10-year bond yields back to the lows seen in January 2009.
Similar moves in Australian bonds, (despite a solid employment report) saw the NZ-AU 10-year yield spread remain around 10bps.
In Europe, after the touted resignation of PM Berlusconi, and ongoing attempts to come up with a credible political path, Italian 10-year yields have stepped down from their highs. Overnight, yields fell from 7.25% to 6.89%, but still worrying levels.
“Safe haven” yields inched higher as risk sentiment stabilised, overnight. US 10-year yields crept up from 2.0% to 2.06%.German equivalents moved from 1.70% to 1.78%. With the recent harsh declines in NZ yields, NZ-US 10-year yield spreads have plunged to 2.12%, at the lower end of their range for the year. We would not expect this differential to fall below 2.0%. Rises in offshore yields overnight, should see NZ yields open higher.
No chart with that title exists.
See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.