By Kymberly Martin

NZ swap yields closed almost unchanged yesterday. Yields remain at the upper-end of ranges.

The market still prices a small (15%) chance of a RBNZ cut in the year ahead. We do not expect cuts.

Demand for NZ bonds remained strong yesterday ahead of Thursday’s DMO auction. Yields dipped a further 1-2bps, pushing 10-year swap spreads (42bps) close to the levels they peaked at last June.

Overnight, US 10-year bonds consolidated further around the 1.86% level. Focus has returned to the US debt ceiling debate and second half (spending) of the ‘fiscal cliff’ negotiations.

President Obama warned “markets could go haywire” if Congress attempts to use the debt ceiling as leverage in the spending negotiations. Prepare for protracted and noisy gamesmanship with an eventual cobbled together solution.

Later this morning, attention will turn to the scheduled speech by Fed Chairman Bernanke. Any attempts to soften the markets more hawkish interpretation of the December minutes would see US long yields slip further back into long-established ranges.

Overnight, Italy and Spanish bond spreads to German equivalents ticked up.

There is a sense investors may be lightening up ahead of Spanish sovereign bond auctions later in the week.