Expect NZ long yields to continue feeling pressure from the downshift in offshore yields

by Kymberley Martin

NZ yields closed lower across the swap and bond curves. Overnight, “safe haven “US and German yields fell after weaker than expected Eurozone PMI data releases.

NZ swap yields opened under downward pressure given the fall seen in US yields the previous night. Then, the weaker than expected NZ GDP release exacerbated pressure on short-end yields.

In the afternoon, the low-side Chinese PMI reading only added to the slightly more cautious mood, and swap yields declined into the close. 2-year closed down 5bps, at 3.08%, but still comfortably in its recent band of consolidation.

We believe that business and mortgage-related interest to pay fixed rates will support yields on dips to the downside. The 2s-10s curve sits around 152bps.

The DMO auctions saw solid demand with a 2-3x bid-cover ratio.

NZ bond yields declined after the tender, with the disappointing Chinese PMI release also contributing. This saw AU yields head lower, dragging along NZ bond yields. NZ yields closed down 7-10bps on the day. The yield on NZGB21s closed at 4.24%, around the middle of its range relative to AU equivalents.

Overnight, Eurozone PMI data showed manufacturing activity in the region slipping further into contraction.

As a consequence, demand for “safe haven” bonds increased, with the yield on German 10-year bonds dropping from 1.98% to 1.91%. US equivalents dropped from 2.31% to 2.27% currently. For now, US yields have failed to break above their late October spike to 2.40%.

Expect NZ long yields to continue feeling pressure from the downshift in offshore yields. It will take some stabilisation in US yields before NZ yields will get their next leg higher.