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.