Fixed Interest Markets by Kymberly Martin
There were striking moves again in NZ interest rate markets yesterday. Swap yields climbed into the close, but were still down 3-5bps on the day.
With a lack of liquidity, there was limited resistance to swap yields falling to new lows yesterday. By early afternoon, 2-year swap yields had fallen 13bps to 2.65%, before snapping back to close at 2.73%. Pricing for RBNZ rate cuts have inched down a little further. The market now prices 30% chance of a 25bps cut at the next meeting. We do not expect the RBNZ to cut rates in the coming year, but believe it can comfortably stay on hold for an extended period, if required. 10-year swap yields closed at 4.25%, with the 2s-10s spread steepening slightly to 152bps.
Moves were equally as harsh in bond markets. The bond auction attracted a modest 1.3x bid-to-cover ratio. However, the successful bids were 4-5bps below prevailing trading levels. After the auction, yields moved steadily higher, into the close. The yield on NZGB21s traded as low as 3.83% prior to the auction, before closing at 3.91%. On the day, bond yields closed up around 1-3bps. The spread of NZ 10-year yields to AU and US equivalents has now dropped to -20bps and 188bps respectively. This is the lowest NZ-US spread since February.
Yesterday, the interdependence of the global financial system was back in the spotlight. Rating agency, Fitch, warned the ‘stable’ rating outlook for US banks could change if the Eurozone debt crisis is not resolved. Similarly, Moody’s downgraded 10 German banks over concern about the impact of them being forced to accept losses on European sovereign bond holdings.
Spain auctioned €3.6b of 10-year debt overnight. It attracted the weakest demand since 2008, at a 1.5x bid-to-cover ratio. The auction yielded 6.97%, some way above the 5.43% paid on similar bonds just a month ago. In an indication of contagion in the region, a French auction of 5-year bonds yielded 2.82%, up from 2.31% on Oct 20.
Overnight, US 10-year yields experienced choppy trading, exacerbated by conflicting data releases. US housing data surprised to the upside, while the Philadelphia Fed business outlook survey disappointed (3.6 vs. 9.0 expected). Having hit a high around 2.04% early this morning the 10-year yield is currently 1.98%.
There are no key local or offshore indicators today.
See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.