Latest NZ government bond issue better than last week but still relatively weak

By Kymberly Martin

NZ yields closed up 4-8bps across the curve yesterday. Overnight, the ECB disappointed market expectations.

NZ 2-year yields closed at 2.82% back toward the top of their trading range. The 2s-10s curve has remained fairly steady at 96bps.

The DMO bond auction was better than last week but still showed relatively weak demand. The $250m of bonds offered attracted a modest 1.6x bid-to-cover ratio.

After the auction bonds sold off with the yield on NZGB 23s closing up 8bps at 3.58%.

Overnight, the ECB disappointed lofty market expectations. It kept rates unchanged at 0.75%, and announced no immediate concrete measures.

President Draghi did say however that current elevated sovereign bond yields were unacceptable and the ECB “may undertake outright open market operations of a size adequate to reach its objectives”.

It is yet to be decided whether any new purchases would be ‘sterilised’. If they were not then the ECB would be entering similar ‘money printing’ territory as the US Fed and the Bank of England.

The market reaction was swift and harsh. Demand for ‘safe haven’ German bonds returned and 10-year bond yields plunged from 1.40% to 1.23%. This takes yields back toward their all-time lows.

Non-core European bond yields soared. Spanish and Italian spreads to German bonds widened 50-60bps. Spanish-German 10-year spreads, at 594bps, are now back toward their highs early last week.

Ahead of the ECB comments, Spain had managed to sell €3.13b of bonds, which was more than its target. It sold 10-year bonds at a yield of 6.65% compared with a 6.43% yield at the last auction a month ago. By the end of the night Spanish 10-year yields were at 7.17%.

Expect NZ yields to open down after events overnight. There are then no NZ data releases today, as the market awaits the all important US non-farm payrolls tonight.