Fixed Interest Markets by Kymberly Martin
NZ yields declined a little further on Friday, as the EU summit got underway. On Friday night, global “safe haven” yields rose. EU summit announcements however were underwhelming.
On Friday, NZ swap yields opened sharply lower. But they crept higher over the course of the day, to close down only 2bps at the short end and 6bps at the long end. The market is now pricing over 20% chance of an RBNZ rate cut at the next meeting. 2-year and 10-year swap yields closed at 2.74% and 4.15% respectively. The 2s-10s curve has flattened to around 140bps.
The DMO auction attracted a modest 1.7x bid-to-cover ratio. The 75m of 19s were successfully bid at 3.65% and the 75m of 23s at 4.09%. The market’s attempt to rally afterward was unconvincing, with the yield on 19s closing at 3.65% and that on 21s at 3.90%. The yield on NZ 10-year bonds have moved back toward their November lows as global uncertainty has once again taken hold. The NZ-US 10-year spread has fallen to 185bps, the lowest level since February this year.
On Friday night US and German 10-year government yields rose steadily from just below 2.0% to close at 2.06% and 2.15% respectively. Moves in non-core European yields were relatively contained. Italian 10-year yields closed at 6.36%, down from highs of 7.26% a fortnight ago. Announcements from the EU summit were somewhat underwhelming. Eurozone members have agreed to a ‘fiscal compact’ that will cap structural deficits at 0.5% of GDP. A treaty will be tabled early next year.
The UK opted out of participation, meaning the accord will likely only apply to the Eurozone 17 as opposed to EU 27 countries. UK 10-year yields continue to trade around 2.15%. This suggests they are trading closely with US “safe haven” bonds, as opposed to having significant sovereign risk premium applied to their yield.
In the week ahead, we get the US FOMC rate decision on Wednesday, which should return some attention to the US economic outlook. Today, the Westpac NZ consumer confidence survey is released. This will provide further evidence of the impact of offshore events on NZ sentiment. Given developments over the weekend, NZ yields may show some relief today, rising on the open. However, EU issues are far from resolved, so expect headlines to continue to dominate trading this week.
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Kymberly Martin is part of the BNZ research team.
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