Fixed Interest Markets by Kymberly Martin
It was a busy day in NZ markets. Bond yields declined by 16bps at the mid to long-end part of the curve. Swap yields declined 10-12bps along the curve.
Yesterday, NZ yields moved lower following the declines seen offshore. In addition, the GBNZ11 matured yesterday, resulting in a lengthening of the bond index by around half a year. The yield on 13s declined 7bps to 2.52%. At the long-end, yields on 21s and 23s declined by 16bps, to 4.01% and 4.15% respectively. This is a new low for the NZ 10-year yield. The NZ-AU 10-year spread has fallen to –7bps. The NZ-US 10-year spread has narrowed to 195bps, its lowest level since July this year.
Swap yields declined by 10-12bps across the curve, taking short-end yields to new historic lows. 2 year yields closed at 2.85%, in illiquid markets. The market has removed any expectation of rate hikes in the coming year, and now prices around a 25% chance of a 25bp rate cut at the next RBNZ meeting. The risk is that the market moves to fully price cuts for the year ahead, in line with the trend seen in other global markets. Ultimately, we do not believe the RBNZ will deliver on these expectations, unless there is a significant deterioration in offshore issues. 10-year swap yields declined 11bps to 4.34%, maintaining the 2s-10s curve at close to 150bps.
Overnight, “safe haven” US and German 10-year yields remained relatively range-bound around 2.05% and 1.78% respectively. Italian 10-year bond yields crept up over 7.00% again last evening. Spanish equivalents spiked to 6.34%, above the levels they reached in late July, prior to the ECB stepping in to buy bonds. French, Belgian and Austrian spreads to German bunds all reached new Euro-era highs.
Today, we get important indicators for the global interest rate outlook with the AU wage cost index, Eurozone and US CPI releases, and the Bank of England’s quarterly inflation report.
No chart with that title exists.
See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.
4 Comments
The dash from cash would seem to need some explanation in addition to repricing OCR expectations.
Notably, our banks' credit risk profile would seem to be on the rise.
But the fascination with our government stock can only be for those borrowing short to lend long as current term yields right along the curve would seem to reflect a negative real return in respect of nominal GDP @ 5.67% and inflation not far behind.
Unless, of course, perceived capital safety is an important feature in investors expectations.
The rising bank bill/tbill spread maybe a reflection of this concern.
The 'huge amount of cash' on company balance sheet, wherever it is, is likely as not to be dwarfed by the amount of term loan facilities that have been drawn against or are in standby mode. As time goes on, and those facilities mature, companies are likley to apply 'that cash' against debt retirement ( it's cheaper to repay a term loan costing , say, 5% than keep the compensating cash in the bank at 0.25%). Isn't that what we are trying to achieve? ...lower levels of aggregate debt.
@ steven
Bank of New York Mellon Corp was the bank cited to have charged 13 bps to accept deposits greater than USD 50 million - but it would appear they are having troubles of their own.
Other than that cash is worthless in the US except to offer collateral against cheques issued, hence most US banks have huge cash reserves lodged at the Federal Reserve just so they can trust each other. This money was generated out of thin air by the Fed buying securities off the same banks.
Other than that they keep fairly large chunks in US Treasuries
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.