Failed German bond auction and fall in Chinese PMI helps yields lower

Failed German bond auction and fall in Chinese PMI helps yields lower

Fixed Interest Markets by Kymberly Martin

There was a further fall in NZ yields yesterday, as a resolution to the debt issues in both Europe and the US looks increasingly distant. Yields declined 4-6bps across both curves.

Yields drifted lower, exacerbated mid-afternoon by a fall in the Chinese PMI to below the 50 expansion level (48.0). The yield on GBNZ 21s closed at 3.93%, and the yield on GBNZ13s at 2.42%. A substantial $450m DMO bond tender was announced for today. Despite yields being close to NZ historic lows, demand is likely to still be solid from global investors. Even below 4.0%, NZ 10-year yields look attractive, given the woes in other parts of the world.

Swap yields similarly declined 4-6bps across the curve. The yield on 2-year swap closed at 2.65%. The curve remains around 155bps steep.

In a striking move in Europe overnight, bids for German 10-year bonds at auction, came in 35% below the maximum amount on offer. The yield on German 10-year bonds rose from 1.95% to 2.15%. The rise in yield reflected additional sovereign risk premium as opposed to improving risk appetite.

This throws the “safe haven” statues of German bonds within Europe into question. The 5-year German CDS spread (a measure of perceived default risk) has moved from 93bps to 102bps in the past week, though still below the early October peak. The inability of Germany to obtain bids for its debt at auction raises grave concern for the rest of Europe. Italian, Spanish and French bond yields all spiked higher.

By contrast, US 10-year yields were fairly choppy overnight, but continued to trade under the 2.0% level they have been flirting with all month. They are now at 1.94%. This takes the US-German 10-year bond spread to -20bps, its lowest level since May 2009. It is hardly any consolation however, that the remaining “safe haven” bonds are issued by a country with a 100% debt to GDP ratio and political inability to agree on deficit cuts.

Today, we get the NZ trade balance data. The more important driver however, will be global risk appetite. With further heavy falls in equities overnight expect NZ yields to open under downward pressure, especially at the long end.

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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