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Risk appetite fell sharply overnight as Moody's warns on France and US ‘super committee’ seems about to fail

Bonds
Risk appetite fell sharply overnight as Moody's warns on France and US ‘super committee’ seems about to fail

Fixed Interest Markets by Kymberly Martin

Yields rose at the mid to long end of the curve yesterday, while the short-end remained well anchored. Overnight, “safe haven” US and German yields fell, as risk sentiment deteriorated.

In NZ bond markets, the yield on 11s to 15s closed flat to down yesterday. Further out the curve, yields rose from their lows. The yield on 21s closed up 6bps at 3.96%. This closed the gap further with Australian equivalents. The NZ-AU 10-year bond spread now trades at 7bps.

Rises at the long end of the swap curve were more muted resulting in a narrowing of swap-bond spreads (EFP). 10-year EFP is now trading back around 30bps. 10-year swap yields now trade around 4.26%. 2-year swap yields continue to trade around 2.70% as the market discounts close to 20bps of rate cuts from the RBNZ in the year ahead.

Overnight, risk appetite fell sharply. Moody’s issued a warning regarding France’s sovereign rating. They highlighted weaker economic growth prospects and the elevated rates being paid on debt. A downgrade of France’s AAA rating could have serious repercussions for the rating of the EFSF and the credibility of European bailout plans. In addition, in the US, the ‘super committee’ appears poised to announce that they have failed to agree on finding $1.2t of deficit reductions. By legal default, across-the-board cuts of the same amount will kick in, in 2013.

US 10-year yields declined from 2.0% to 1.96%. German equivalents fell to 1.92%. While the yield on Italian 10-year bonds has pulled back from its highs, Spanish equivalents continue to rise. Both now yield close to 6.5%. Spanish yields received no respite from the confirmed victory of the austerity-committed conservatives at Sunday’s election.

This evening we receive the FOMC minutes along with a speech from the US Fed’s Kocherlakota. This should shed further light on the prospects for further QE.

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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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