Australian bonds in demand on weaker Chinese GDP data

by Kymberly Martin

It was a fairly quiet end to the week in NZ markets. NZ yields closed down fractionally on Friday, ending a week that saw lower yields across the curve, with a notable flattening.

However, support levels for swap yields at the mid to long end of the curve appear to be holding. 5-year swap yields ended the week at 3.64% just above critical support levels at 3.60%.

2-year swaps closed at 2.95%. The market currently prices just 12bps of rate hikes from the RBNZ in the year ahead. We expect 50bps, with a first 25bp hike in December.

We continue to see “fair value” on 2-year swaps around 3.20%-3.30%. For now, we expect yields to be quite range-bound, ahead of this week’s key local data release, Q1 CPI.

In NZ bonds, the yield on NZGB23s ended the week down 8bps. Australian bonds were in demand on Friday, after the release of weaker-than-expected Chinese GDP data (8.1% vs. 8.4% expected).

The NZ-AU 10-year bond yield spreads has widened to 37bps. We expect some narrowing of this spread in the near-term.

On Friday evening, US 10-year bond yields slipped back toward the lower end of their range, at 1.98%. They briefly moved higher after the release of higher-than-expected US core CPI data (2.3%y/y vs. 2.2% expected).

However, the data was really not sufficient to prompt changes in expectations for future Fed activity. Yields soon slumped again after the release of slightly weaker-than-expected University of Michigan consumer confidence data (75.7 vs. 76.2 expected).

Spreads between German “safe haven” 10-year bond yields and Spanish equivalents have spiked higher again from 403bps to 424bps.

Spanish bond yields now sit above Italian equivalents as Spain remains in the spotlight for all the wrong reasons. All eyes will be on the sovereign this week as it auctions 12-18 month bills tomorrow, and bonds on Thursday.