Fixed Interest Markets by Kymberly Martin
After the significant moves earlier in the week, moves in NZ fixed interest markets on Friday were relatively subdued. Yields closed a little lower across the curve.
On Friday, bond yields moved a little higher early in the morning, buoyed by the improvement in sentiment offshore. However, this proved short-lived, and yields declined into the close. The yield on GBNZ 21s closed at 4.17%, a touch below the January 2009 low of 4.22%. Following on from the strong demand seen at the DMO auction on Thursday, the yield on other bonds closed down 3 to 4bps. The yield on 13s closed at 2.59%.
Swap yields closed virtually unchanged on Friday. The market has removed all, except 10bps, of RBNZ rate hike expectations in the coming year. Whilst the RBNZ maintains an explicit tightening bias, it is difficult to see the market moving to price outright cuts. Indeed, given current pricing, we see little further downside to 2-year swap rates, that closed at 2.94% (a new, all-time low). 5-year yields closed at 3.70%. The 2s-10s curve remains just below 150bps steep.
Ultimately, we believe the market will be surprised by the magnitude of rate hikes from the RBNZ, in the coming year. However, a stabilising of global risk events will be required, for the market to revise up rate hike expectations.
Offshore, the yield on Italian 10-year yields fell from around 7.00%, to 6.45%, on Friday night, as Italy’s prospects appeared to be improving. PM Berlusconi’s resignation was at hand, and an interim government under former ECB commissioner Mario Monti appears to be on track. Meanwhile, Spanish 10-year yields crept up to 5.85%. German yields also rose from 1.78% to 1.89%.
The week ahead will continue to see global, and particularly European developments, dominate risk sentiment. Locally, we get the PSI today. The loss of momentum see in last week’s PMI may be offset by Rugby World Cup demand in the services sector.
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See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.
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