Credit default risk rises, AU risk now at levels that may add cost to NZ. Safe haven demand for US and German bonds rises

By Kymberly Martin

NZ yields rose 2-4 bps yesterday, taking their cue from offshore.

As risk aversion returned overnight, US 10-year yields have slumped from 2.20% to below 2.12%.

In the absence of domestic data releases yesterday, NZ swaps and bond yields simply took their direction from the previous night’s offshore moves. NZ 2-year swap closed up 2 bps, at 2.71%. The 2-10s curve has steepened fractionally to 88 bps.

Overnight, in the backdrop of further declines in commodities and equities and heightened risk aversion, US Treasuries were back in demand.

‘Safe haven’ US and German bond yields declined.

German 10-year yields declined from 0.69% to 0.59%, now toward the lower end of their range of the past four months. Meanwhile, US 10-year yields have slumped from 2.20% to below 2.12%. The downward move was established early in the evening but likely encouraged by the release of a disappointing US Richmond Fed manufacturing index in the early hours of this morning.

On both sides of the Atlantic, CDX indices (measures of credit default risk) have pushed wider, reflecting reduced appetite for credit risk. The Aussie iTraxx index has pushed out to above 125, approaching levels that have historically resulted in NZ credit spreads being marked wider.

Today there are no domestic data scheduled for release but it will be all eyes on the China Manufacturing PMI to be released this afternoon. Consensus is looking for the index to remain weak at 47.5 i.e. activity remains in contraction. However, the market will still be highly sensitive to any disappointment, given current anxiety around the state of China’s economy.

Kymberly Martin is on the BNZ Research team. All its research is available here.