Even though yields worldwide keep falling, including in New Zealand, NZGB yields still appear attractive to international investors

By Kymberly Martin

Taking their cue entirely from offshore moves NZ swap and bond yields closed lower, with the curve notably flatter yesterday.

Overnight, US 10-year yields traded a fairly wide range between 1.68% and 1.77%.

NZ swaps fell across the curve, from the open, playing catch-up with offshore moves while the market had been closed for Waitangi day.

Unsurprisingly, the greatest pressure was felt at the longer end of the NZ curve, where 10-year swap closed down 10 bps, at 3.20%, a new historic low.

NZ 2-year swap closed down 5 bps, at 2.58%. The market now prices slightly more than 30 bps of OCR cuts by year-end. We anticipate the market will likely move to price up to 50 bps of cuts in coming weeks/months taking 2-year swap down to at least 2.50%. Meanwhile the market prices around 37 bps of cuts from the Reserve Bank of Australia by the end of the year.

Overnight, as the ‘risk-off’ tone extended, US 10-year yields initially touched their lowest level in a year, at 1.68%, before rebounding. Yields currently trade at 1.74%. Japanese 10-year bonds meanwhile offer a negative yield for the first time ever. A quick filter of global 10-year bond yields illustrates why the yield on NZGBs still appears attractive by global comparisons, even when offering a fairly miserly 3.0%. Within developed markets, only Portugal and Greece offer a higher yield.

It is another fairly quiet day on the domestic data agenda. However, tonight all focus will be on US Fed Chair, Yellen’s appearance before the House. There is not too much Yellen could say to further reduce market expectations for Fed activity, given how low they already are. The market now prices just one further 25 bps rate hike over the next two years. Conversely, if Yellen chooses to focus on the improvement in earnings growth and decline in the unemployment rate shown in Friday’s US labour market report, there is some potential for US yields to find support/rebound.