Recent rise in yields continues its unwinding. NZGBs to benefit from supply-demand imbalance. Long rates falling

By Jason Wong

There’s not much to say about the bond market today.  US Treasury rates are all within +/- 1 bp from opening levels.  The 10-year rate is down 1bp to 1.55%.

The sell-off of rates earlier this month is now a distant memory and it looks like we’re back to trading a tight 1.50-1.60% range for now.

Last week’s FOMC showed that any forthcoming rate hikes over coming years are likely to be modest in nature.  And global forces on US Treasuries should be more muted, with Japan’s new “yield curve control” policy in action and European banking woes keeping a lid on German bunds.

On the latter, there was some slightly better news, with Deutsche Bank selling its UK insurance unit and raising some much needed cash, which alleviates some concern about any required capital raising.

This gave a more positive tone to European equity markets, which showed modest gains.  Despite the better market sentiment, Germany’s 10 year rate still nudged lower, down 1bp to minus 0.15%, its lowest close since early July.

The local rates market showed further falls in yield, albeit more so at the long end.  The 2-year swap rate was flat at 2.01%, while the 10-year rate fell by 2bps to 2.47%.  We are receivers of NZ 2y swap, within an expected 1.90-2.10%. This range should sustain in coming months as the market toys with the prospect for one to two more OCR cuts.

NZ’s 10-year government bond rate continued to unwind the big sell-off earlier in the month.  It closed down 3bps to 2.315%.

Despite the recent spread compression, we see the 77bps spread to 10-year US Treasuries as remaining too high and see a move towards the 60bps mark.  We see NZGBs benefitting from supply-demand imbalance in the next few weeks (in the absence of a nominal NZGB auction until 20 Oct), along with declining expectations for NZ-US cash rate differentials.