Positive eurozone news see yields fall and CDS spreads narrow

by Kymberly Martin

There was a relatively quiet tone in the NZ market yesterday. Market sentiment improved overnight.

Swap yields closed little changed. The biggest move was seen in 5-year swaps closing down 2bps at 3.56%.

Bonds were little changed for much of the day, with a small rally into the close. This saw yields close down 1-2bps. The yield on NZGB23s closed down 2bps at 4.12%.

The spread to US and AU equivalents has narrowed a little to 212bps and 32bps respectively. We expect further narrowing.

Data yesterday showed that non-resident ownership of NZ bonds moved up from 60.3% to 60.9%.This confirms that offshore investors remain an important source of demand for NZ bonds.

However, the proportion remains somewhat lower than for Australian bonds where foreign ownership is seen in the realm of 80%.

The RBA minutes released yesterday did little to change our expectation for a May 25bp rate cut (unless the next CPI release surprises to the upside). They also did little to change market expectations for a further 96bps of rate cuts in the year ahead (we believe this is too aggressive).

Overnight, markets were buoyed by two key pieces of news. First, Spain sold €3.2b of bills, more than its target of €3b, despite yields being noticeably wider than last month.

The German ZEW survey also surprised positively.

As a result, Spanish 10-year yields have fallen back below 6.0% and spreads to German bonds have narrowed.

Spanish CDS spreads (a market measure of default risk) have also fallen from their highs. German 10-year bond yields have risen from 1.72% to 1.75% and US equivalents from 1.97% to 2.01%.

Today, NZ yields will likely open up and find support after the improvement in sentiment overnight. There are no NZ data releases today.