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Credit default risk pushes higher as commodity and equity prices fall; 'safe haven' assets in demand

Bonds
Credit default risk pushes higher as commodity and equity prices fall; 'safe haven' assets in demand

By Kymberly Martin

NZ swap and bond yields closed flat to down 1bps yesterday.

Overnight, US 10-year yields drifted down from 2.16% to 2.10%.

In the absence of domestic data releases, the NZ market was fairly quiet at the start of the week. NZ 2 and 5-year swap closed at 2.73% and 3.08% respectively.

5-year swap is now within 20 bps of its mid-2012 lows. The 2-10s curve closed at 83 bps, mid the 60-115 bps range we see through to year-end.

It was another volatile night for markets as commodity and equity prices plunged and CDS indices (measures of credit default risk) pushed higher. The AU iTraxx index now trades at 132, its highest level since July 2013, during the ‘taper tantrum’. i.e. the global bond sell-off in response to suggestions from the US Fed that it could soon taper its quantitative easing programme.

In this backdrop, US Treasures were in demand along with other ‘safe haven’ assets such as the CHF and JPY. US 10-year yields declined from evening highs above 2.16% to trade at 2.10% currently.

This was despite comments from Fed member Dudley that suggested every coming Fed meeting is ‘live’ for ‘liftoff’, including Oct. He also stated that declining oil price and stronger currency’s dampening influences on inflation have to be transitory. In addition, he stated the Fed would not be “overweighting” international developments in its decision-making. That said, Fed fund futures have fractionally revised down their expectation for the FFR by year-end. It is now priced at just 0.20%, from its current level mid the Fed’s 0-0.25% range.

Today it is relatively quiet on the local data-front, so sentiment will likely be driven by how the Asian equity market responds to the solid falls seen on either side of the Atlantic overnight.


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

Daily swap rates

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Source: NZFMA
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4 Comments

It was another volatile night for markets as commodity and equity prices plunged and CDS indices (measures of credit default risk) pushed higher. The AU iTraxx index now trades at 132, its highest level since July 2013, during the ‘taper tantrum’. i.e. the global bond sell-off in response to suggestions from the US Fed that it could soon taper its quantitative easing programme.

If the eurodollar intrusion starting in 1995 is going to be reversed (it certainly looks that way more and more), then profit expectations are wholly unrealistic as are, unfortunately, economic expectations. Read more

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Equity and commodity markets are certainly volatile at present. It is therefore not a surprise that commentators are seeing less evidence of Asian investors in the Auckland property market. It will be interesting to see what happens over the next few months as more and more people put their houses on the market to lock in profits and to reduce their debt levels. Are we seeing the beginning of the end?

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Given that, ..The ongoing, visible contractions about inflation have little to do with consumer prices, I would have to agree. Read more

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Perhaps "help" (lol) is on the way?

Such is the nature of the exponential and discontinuous events that face us in a world manipulated by the Federal Reserve.

http://taomacro.com/large-graph.html

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