by Kymberly Martin

NZ yields inched down a little on Friday, and the DMO auction attracted solid demand.

Friday was relatively quiet, with NZ swap yields closing down a fraction, with 2-year at 2.80%. The short-end of the curve continues to price a slight chance of a 25bps rate cut from the RBNZ in the year ahead (30% chance by mid year). Rather, we see the RBNZ on hold for most of the year ahead.

Bond yields closed down 3-4bps after a solid DMO auction of 100m of 21s. The yield on 21s closed at 3.91%, around 10bps and 200bp respectively above AU and US equivalents. This is close to the top of their recent ranges, and suggests NZ long yields have room to fall relative to their off-shore counterparts. However, it does appear the market is already long on NZ bonds, limiting further upside (declines in yield).

Overnight on Friday, US 10-year yields slipped from 1.94% to 1.89%, the bottom of recent ranges. This occurred after the low-side print on US Q4 GDP (2.8% vs. 3.0% expected).

Rating agency, Fitch, downgraded Spain and Italy and placed Ireland on negative watch. The ratings however are now only in line with, or better than, S&P equivalent ratings.

The market showed little reaction. In fact Italian and Spanish yields continue to drift lower. Italian 10-year yields are now down at 5.90% (from recent highs above 7.20%).

The ECB’s 3-year loan facility to banks seems to be soothing nerves, and easing pressures on banks to sell sovereign bonds. Reduction in selling pressure is seeing a notable fall in sovereign financing costs. The week ahead will bring several more data points in this regard, with Italian, French and German bond auctions.

Locally, this week’s data is mostly of 2nd tier importance for fixed interest markets. Today’s Performance of Services Index would do very well to hold onto last months surge higher to 56.6, some way above the equivalent manufacturing index at 51.9.

There is a slew of PMI data from China, Europe and US, from mid week. These will likely be the more significant drivers of markets this week, along with ongoing developments in Europe. Solid PMI releases should see long yields globally move up, dragging NZ equivalents higher, and curves steeper.