by Kymberly Martin
Reversing previous days’ moves NZ yields closed up 2-6bps yesterday. Overnight, market sentiment stabilised.
NZ 2-year swap yields closed at 2.97% yesterday, up 3bps. The market continues to price only 13bps of RBNZ rate hikes in the year ahead.
The 2s-10s curve has steepened a little to 139bps. In the near-term we expect a steepening bias to prevail as we move off key support levels.
We continue to see fundamental “fair” level on this curve at 150-160bps.
Yesterday’s DMO bond auction was well received with an average 3.2x bid-cover ratio for the 200m of bonds offered across 3 tenors (17s, 19s, and 23s).
There was a relatively muted rally in bonds after the tender. Near-term we continue to see value in NZGB 23s relative to AU equivalents.
The NZ-AU 10-year bond spread sits at 29bps near the top of its widened -20bps to 35bps range.
Overnight, Italy sold €4.88b of bonds, close to its €5b maximum target. Still funding costs have risen since recent actions.
For example the 2015 bonds sold at an average 3.89% up from 2.76% the last time the bonds were offered in mid-March.
Italian 10-year bond spreads to German equivalents narrowed from 375bps to 361bps. Spanish spreads also narrowed.
US 10-year bond yields crept up from 2.02% to 2.06% overnight. This was despite a sharp dip on the release of this week’s US initial jobless claims number. Claims rose to 380k (355k expected) hot on the heels of last Friday’s disappointing US payrolls number.
There are no NZ or AU data releases today. Expect NZ yields to consolidate ahead of the weekend.
Tonight the key data releases will be US CPI.
The market expects core CPI to remain at 2.2%y/y. A containment of inflation around these levels is important if the Fed is to justify its current highly accommodative policies.
The University of Michigan Consumer Confidence survey is also released.
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