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Strong demand and limited supply sees 10 year spreads at almost one year highs

Posted in Bonds

By Kymberly Martin

Strong demand for long-dated NZ bonds in the backdrop of limited supply remains the key driver of markets at present.

Overnight, US 10-year yields again attempted unsuccessfully to break above 1.90%.

Persistent demand for NZ bonds during the summer break from DMO auctions has seen bond yields close down a further 2bps. Bond spreads to both US and AU counterparts have narrowed in the process. NZ-US 10-year bond spreads are now at their lowest level since March 2009.

Consequently, swap-bond yield spreads have also widened further.

10-year spreads, at 37bps, are approaching their wides of last year. This situation may continue until regular DMO bond auctions resume later this month. Over the year however we do see swap spreads as biased to widen, as weekly bond issuance remains contained and the curve flattens into year-end.

NZ swap yields themselves closed little changed. 5-year remains at 3.2%, in the upper half of its trading range. 2-year remains around 2.76%, consistent with the market pricing around a 20% chance of a RBNZ rate cut in the year ahead. We do not expect cuts, but rather a first hike in December.

Overnight, peripheral European bond spreads narrowed. A successful Spanish bond auction assisted. Italian-German 10-year bond spreads fell to 260bps, their lowest level since July 2011.

US 10-year bond yields traded up from1.86%, once again attempting to break above 1.90%, before consolidating around the 1.89% level.

Today, there are no scheduled data releases on either side of the Tasman. Expect demand for NZ bonds to remains solid, with the potential for further relative yield compression. 


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