By Kymberly Martin

NZ swaps were pretty much in a holding pattern yesterday. 2-year swap yields closed mid-range at 2.71%. The 2s-10s curve has flattened a little further to 102bps. We continue to eye 95bps as the bottom of the trading range for the 2s-10s curve.

It was a relatively quiet in markets overnight also, as activity thins heading into the end of year. US and German ‘safe haven’ 10-year bond yields consolidated around 1.62% and 1.30% respectively.

Once again, the key resistance level for US bond that has held for 4 months appears to be holding.

The key test to this level will come with Wednesday’s FOMC meeting. Still, expectations are already high that the Fed will announce an extension of its asset purchases. So that in itself is unlikely to result in yields breaking lower.

Overnight, the market responded severely to Italian (unelected) P.M, Monti announcement he will resign. Having overseen relative calm in Italian markets in recent months he attempted to quell market fears that his departure would leave a power vacuum.

Uncertainty will remain high in the lead up to elections early next year. Deposed P.M. Berlusconi has vowed to re-stand for election on an anti-austerity, anti-German platform.

Italian 10-year bond yields have spiked almost 40bps in the past week, with spreads to German bonds widening almost 50bps. Spanish spreads have also been dragged wider.

Expect another fairly quiet day in NZ markets today. Electronic card data for November will be released. Also QVNZ house price data will be released. The RBNZ will keep an eye on such data, to assess the extent to which house price gains are becoming a nationwide phenomenon. Risks presented by recent house price trends received much discussion at the recent RBNZ meeting.