Fixed Interest Markets by Kymberly Martin
Yesterday, swap yields closed down another 2-4bps across the curve. They opened lower and failed to remake the ground on the day. 2-year yields closed at 2.71%. The short-end continues to price around 20% chance of a rate cut from the RBNZ at the next meeting. We do not expect cuts. 5-year swap yields continue to languish at all time lows, around 3.28%.
Bond yields mostly treaded water yesterday, closing unchanged. NZ 10-year yields trade at 3.87%. In the past couple of weeks, NZ 10-year yields have declined relative to their AU counterparts. They now trade at similar levels. However, NZ swap yields have declined more than bond yields (10-year EFP has narrowed to 20bps), so the immediate direction for NZ long yields from here, seems unclear. Over the medium-term we continue to see long-end bonds as too expensive and expect yields to rise.
The DMO announced a relatively light auction for today, with just 50m of 19s and 50m of 23s on offer. The DMO is likely responding to the modest demand at recent auctions.
Yesterday morning the US FOMC meeting was relatively low key. The Federal Reserve noted Eurozone risks but improving US economic performance. It did not announce any further easing measures, preferring to await developments in the new year.
US 10-year yields fell steadily overnight, from just below 2.00% to 1.94%. German equivalents fell to 1.92% as global risk appetite declined further. Italy sold €3b of 5-year bonds at 6.47%, its highest yields since 1997. The bid-to-cover ratio was 1.42x. Familiar rumours swirled overnight of a potential downgrade to France’s sovereign rating. French 5-year CDS spreads (the market price of potential default) are surging toward previous highs.
Today we get the NZ PMI. While it dropped into contraction territory last month, at 46.5, on balance we expect some recovery this month. Tonight, we get the Eurozone PMI, CPI and employment data for the latest pulse check on Eurozone.
See our interactive bond rate charts here.
Kymberly Martin is part of the BNZ research team.