Selling pressure in NZ bonds with yields closing up 9 to 10bps

by Kymberly Martin

There was a solid rise in yields yesterday, as NZ played catch up with the moves previously seen offshore.

Swap yields closed up across the curve. 2-year yields were nudged to the top of their ranges since November. They traded as high as 2.905% before closing at 2.88%.

There was reasonable liquidity however yields struggled to push further. The 2s-10s swap curve steepened by about 6bps to 137bps. 10-year swap yields closed up 12bps at 4.25% in sympathy with off-shore moves. We also saw some interest from corporate payers, keen to lock in some protection from rising yields.

Following the RBA decision to keep rates ‘on hold’ at 4.25% the market now prices ‘just’ another 60bps of rate cuts from the RBA, and 9bps of rate hikes from the RBNZ. The AU 3-year swap rates has risen 23bps in the past 2 days, breaking the top of its range since November. The NZ-AU 3-year spread continues to sit around 126bps.

There was selling pressure in NZ bonds also, with yields closing up 9 to 10bps. This saw NZ spreads to US and AU equivalents bounce off the bottom of their ranges. NZ-AU 21s spread moved from -13bps to -10bps, and NZ-US spreads from 182bps to 189bps. Overnight, US and German 10-year yields consolidated around 1.98%.

The DMO has announced 200m of NZGB23s for its tender today. Despite their rise, NZ bond yields are still relatively depressed compared to AU equivalents and NZ swaps (swap spreads widened further yesterday). These factors should dampen demand today, though recent interest from large Asian buyers may help the tender.

Attention will return to local data this morning with NZ employment data. An on-expectations result (see NZD section) may be enough to continue to nudge NZ yields a little higher today.