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Auction of €3.35b of 10-year debt paid an average yield of 1.28%; German 10-year bond yields slipped from 1.30% to 1.23%

Posted in Bonds

By Kymberly Martin

NZ swap and bond yields closed up 1-2bps yesterday in fairly quiet trading.

Yesterday’s CPI data came in on our expectations at 0.9%y/y. The market showed little response, content to still price close to a 50% chance of 25bps hike from the RBNZ by March next year.

A first hike in March remains our central case. Despite current contained inflation we (and the RBNZ) continue to see inflation picking up into year-end and next, necessitating rate hikes in 2014.

NZ bonds yields closed a fraction higher. Despite near-term supply constraint we think it will be difficult for NZ bonds to rally further.

This is particularly true as 10-year yields (3.29%) are now within 10bps of all-time lows; compare unfavourably to a 4.6% dividend yield on NZ equities; and NZ-US and NZ-AU 10-year spreads are now at the bottom of ranges, at 160bps and 3bps respectively.

We continue to believe NZ bond yields should trade at a decent level higher than AU equivalents. The AU sovereign holds a superior credit rating and we see divergent rate paths ahead (RBNZ hiking, RBA cutting).We initially target 25bps on NZ-AU 10-year bond spreads.

Overnight, as a clear ‘risk off’ mood returned to markets German 10-year bond yields slipped from 1.30-1.23%.

At an auction of €3.35b of 10-year debt the sovereign paid an average yield of 1.28%, a new record low. However, peripheral European spreads to German bonds remain fairly contained.

US10-year bonds once again faced resistance when yields touched below 1.68%, returning to trade at 1.70% this morning.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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