DMO bond auction attracts demand at an average 2x bid-cover ratio

by Kymberly Martin

NZ yields closed up across the curve yesterday. A slight steepening was seen in the swap curve. Non-core European yields fell sharply overnight, benefiting from the previous day’s LTRO auction.

NZ swap yields moved higher yesterday. This was driven by strong interest to pay fixed rates at the long-end of the curve. The short-end was more contained, with 2-year swaps finding resistance at the familiar 3.10% level. The market appears to be reluctant to push the short-end higher ahead of the RBNZ meeting next week.

The market continues to price around 25bps of hikes from RBNZ in the year ahead.

We expect more than this, and next week’s meeting may act as a catalyst for short-end yields nudging higher. In the meantime the 2s-10s swap curve has steepened slightly to 141bps.

Bond yields rose 6bps across the curve yesterday.

The DMO bond auction attracted modest demand at an average 2x bid-cover ratio for the 150m of bonds offered. After the auction, bonds sold off into the close. The yield on NZGB21s and 15s closed up 6bps at 4.15% and 3.12% respectively.

Overnight, non-core European bonds continued to feel the positive impact of the previous night’s LTRO auction. Amidst speculation that LTRO funds were directly being used to purchase sovereign bonds, yields on Italian and Spanish bonds fell sharply. Italian 10-year bond yields fell from 5.19% to 4.95%, their lowest level since August last year.

Having fallen from above 7% in January they now trade at levels that appear quite “normal” in the Euro era.

In this context, demand for German “safe haven” bonds waned, and yields rose from 1.81% to 1.87%. US 10-year yields were on a steady upward path also. On the release of the US ISM manufacturing data (52.4 vs 54.5 expected) yields gapped lower, but rapidly recovered to end the night at 2.05%.

It is a fairly quiet day ahead, data-wise. However expect further upward pressure on NZ yields given the moves seen overnight.