Turbulent night on bond markets. UST yields higher, NZ swap rates fall, ECB even beats recently raised extectations

By Kymberly Martin

NZ swap and bond yields closed down 4-7 bps yesterday.

Overnight, US yields had a turbulent night after the ECB’s announcement but 10-year has returned to trade at 1.87%.

Following the previous night’s surprise cut from the Bank of Canada, the NZ market yesterday moved to price a greater chance of a rate cut from the RBNZ.

The market now prices around a 40% chance of a 25 bps cut in the coming 12 months (The market prices around 46 bps of cuts form the RBA over this time).

NZ 2-year swap closed at 3.62% while 10-year closed at 3.78%. We expect 2-year will likely continue to fall toward 3.50% in the near-term and the curve will experience some ‘bull’ steepening.

Last night it was all about the ECB. It managed to beat even recently raised expectations for its quantitative easing programme. It will buy €60 bln of assets per month (including €10 bln/month under its current programme) from March until September next year i.e. a total of around €1.1 tln. At around 10% of GDP, the programme is close to the size and speed of initial QE undertaken by the US Fed and BoE.

After September it will continue its purchases “until we see a sustained adjustment in the path of inflation”. Purchases will include both investment-grade sovereign bonds and the debt of other agencies and European institutions.

German bonds rallied on the news as did peripheral European bonds. The yield on German 10-year bonds fell from 0.58% to 0.44%. Italian-German 10-year spreads crunched in to 110 bps, their tightest level since mid-2010. Greek 10-year bond yields have fallen to 8.77%, despite Sunday’s looming General Election, having been as high as 10.5% earlier this month.

Today NZ Crown Financial Statements will be released. China, Eurozone and US PMI data for January will also be released.