Gloomy markets drive down yields worldwide; expect local yields to fall further

By Kymberly Martin

NZ swaps closed flat to up 1 bps, while NZ bond yields declined 1-2 bps across the curve.

Overnight, US 10-year yields declined from 2.50% to 2.41%.

The start of the new financial year prompted a bit more activity in the NZ swap market yesterday. With paying interest from the SME and corporate sector, NZ swaps inched higher.

We continue to expect that the current flatness of the NZ 2-10s curve will prompt further corporate interest in extensions, even for those who are quite well hedged overall.

Yesterday 2 and 5-year swap closed at 4.09% and 4.58% respectively. The 2-10s curve closed at 49 bps.

The yield on NZGB23s closed a little lower, at 4.13%.

Today, given moves seen overnight, we would not be surprised to see these yields fall further toward the early September low, of 4.07%.

German yields continued their decline overnight, assisted by PMI data that showed German manufacturing activity slipped into contraction (49.9) in September. German 10-year yields, at 0.9% are now back close to historic lows reached in early-September.

Next, the US September ADP employment report provided a slightly above consensus outcome (213k vs. 205k expected), but this was not sufficient to satisfy an already gloomy market.

Then the September US Manufacturing ISM dropped further than expected, to 56.6 (58.5 expected). Combined, this was enough to extend the decline in US 10-year yields to 2.41%.