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Strong Government bond auction helps rates lower

Strong Government bond auction helps rates lower

Fixed Interest Markets by Kymberly Martin

There was a further decline in NZ yields across the curve yesterday. The DMO auction attracted strong demand, after which the bond market rallied. Overnight, the ECB cut rates by 25bps.

Yesterday, NZ bond markets were relatively range bound ahead of the DMO auction. The 2pm auction saw bid-to-cover ratios of 2 to 2.7x for the NZGB17s, 21s and 23s on offer. The 50m of 19s offered attracted a massive 8.3x bid-to-cover ratio. Consequently, bond yields fell quite sharply after auction, from 4bps at the short-end, to 9bps for 23s. The yield on 13s closed at 2.72% and that on 21s at 4.31%. It appears that given ongoing global uncertainty, demand for relatively “safe”, relatively high yielding NZ bonds remains solid.

Swap yields also declined, but much more modestly.  The Q3 NZ employment data, though disappointing on the headline unemployment rate (6.6% vs. 6.4% expected), was not weak in the detail. It did little to budge market expectations of just over 30bps of RBNZ rate hikes in the coming year. 2-year swap yields closed down 2bps at 3.07%. Similarly, 5 and 10-year swap yields declined 2bps to 3.86% and 4.58% respectively. The sharper fall in bond yields, relative to swap yields saw swap-bond spreads widen. 10-year EFP now trades around 27bps.

At his first meeting as ECB president, Draghi surprised the market by cutting rates by 25bps to 1.25%. He was adamant to say that he sees the remit of the ECB as maintaining price stability in the medium term and not the lender of last resort for EU governments. The cut was seen as pre-empting slowing EU growth that was heading toward a “mild recession”. The cut suggests Draghi will not be shy of making bold decisions.

Overnight, as risk appetite improved, “safe haven” US and German 10-year yields crept up to 2.06% and 1.91% respectively. Italian 10-year bond yields remain elevated above 6%.

The RBA releases its Monetary Policy Statement today. This will shed some light on current central bank thinking after their 25bps rate cut earlier this week. The market continues to price over 100bps of rate cuts from the RBA in the coming year, which we see as too aggressive.

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See our interactive bond rate charts here.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.

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