Fixed Interest Markets by Kymberly Martin
NZ bond yields closed 4bps higher across the curve. 10-year yields are now almost 20bps off their lows of a fortnight ago, at 4.07%. The DMO bond auction saw solid bids for 100m of 19s, but fairly modest bids for 50m of 23s. NZ 10-year spreads relative to US and Australian equivalents now sit at 196bps and 4bps respectively.
NZ swap yields closed up around 7bps across the curve. Markets now expect the RBNZ to be on hold for the coming 12 months. 2-year swap yields are now up around 25bps from their lows of a week ago. The 2s-10s spread remains remarkably stable around 150bps, where it has traded for the past month. 10-year swap-bond spreads are sitting around 30bps.
Late last night, major NZ and Australian banks suffered a one notch downgrade from rating agency S&P to AA- from AA. The outlook was maintained at stable. The moves were largely in line with market expectations. The moves were part of a world-wide revision by S&P of bank ratings. These take greater account of the systemic risks to the banking system in each country.
Overnight in Europe, Spain and France successfully auctioned €8.1b of bonds. The auctions were a test of investor sentiment after the coordinated central bank efforts the previous day. The Spanish auction of 5-year bonds was more than 2x bid. France’s auction included 10-year bonds that were sold at a yield of 3.18%, lower than the level achieved in early November. In the past week, French 10-year yields have plunged from 3.72% to 3.10%, in a sign of improving sentiment toward Eurozone prospects.
While market sentiment stabilised somewhat overnight, US 10-year yields experience relatively quiet trading, moving up to 2.08%. NZ yields may face some mild upward pressure today, given the moves seen offshore overnight. However, as we move into next week, expect focus to shift to Thursday’s RBNZ meeting. We expect this may serve as a catalyst for higher NZ yields, as the RBNZ confirms it has a near-term “wait and see” approach, but a medium-term tightening bias.
See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.