by Kymberly Martin
NZ yields followed their offshore counterparts lower yesterday. European concerns remain in focus.
NZ swap yields closed down 1-7bps yesterday with a notable flattening bias. 2-year swaps closed down 4bps at 2.91%.
The market now prices just 11bps of RBNZ rate hikes in the year ahead.
We expect more than this, but there is no immediate catalyst to reverse expectations. This is particularly true when investors are responding to a general deterioration in global risk appetite as opposed to NZ specific indicators (which remain solid).
However, we do not expect NZ swap yields to break their late 2011 lows, and therefore see current dips as an opportunity to hedge against future OCR hikes. The 5-year swap yield offers good value at its current level of 3.58%, in our view.
NZ bond yields have also slumped around 5bps. The NZ-US and NZ-AU 10-year bond yield spreads have narrowed by around 4bps to 216bps and 333bps respectively. We continue to position for further closing of these spreads.
Overnight, markets focused on Spain again. Spanish 10-year bond yields rose above 6%, though still someway short of the 6.7% they spiked to at the end of last year.
Spanish spreads to German “safe haven” bonds have widened. German 10-year bond yields have fallen towards their lows, below 1.72%.
US 10-year bond yields rose briefly last night on the back of stronger-than-expected US retail sales data, but fell back to trade around 1.97% after the release of the NAHB housing index disappointed.
Today, the RBA minutes from its April meeting will be released. The market still prices another 100bps of rate cuts in the year ahead.
We believe these expectations are too aggressive. Tonight, the Eurozone will be back in focus with the German ZEW economic sentiment survey, and Spain returning to markets to auction 12-18 month bills. Eurozone CPI is also released.
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