NZ swap yields lower as US and German benchmark bond yields fall further. Short end in NZ stable, pressure lower at long end

By Kymberly Martin

NZ swap and bond yields closed down 1-5 bps on Friday.

On Friday night US 10-year yields drifted down from 2.16% to 2.08%.

NZ yields initially pushed higher on Friday morning following the previous night’s offshore moves. However the moves didn’t last as receiving interest returned to the swap market.

In addition, there was strong demand at the DMO tender of NZ$300 mln of 2027 bonds. These attracted in excess of a 4x bid-to-cover ratio. They were also sold at a level 4 bps below the mid-yield ahead of the tender. Clearly demand for NZD product remains strong, given the attractive real yield by global comparisons.

NZ 2-year swap ended the week at 3.81% while 10-year closed at 4.21%. This takes the 2-10s curve back to 40 bps. We see this as close to the cyclical trough on this curve, and would expect corporate paying to be enticed out to the longer-end of the curve at these levels.

At the short-end of the curve we continue to see no particular urgency to add to hedging. Short-end yields are unlikely to push much higher through H1 as the RBNZ remains firmly on hold.

On Friday night, in the backdrop of further falls in the oil price and equity markets, US Treasuries caught a bid. 10-year yields drifted down to end the week at 2.08%.

German equivalents also fell to new historic lows of 0.62%.

Expect this to add flattening pressure on the NZ curve at the open this week.