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Spanish bonds now yield higher than Italian equivalents

Bonds
Spanish bonds now yield higher than Italian equivalents

by Kymberly Martin

NZ yields moved a little higher early yesterday before slipping back later in the afternoon. Overnight, “safe haven” bonds were back in demand.

The short-end of the NZ swap curve continues to find support, despite a slight slip in market expectations for RBNZ rate hikes in the year ahead, to 22bps.

The 2-year swap closed at 3.01%. It will be critical for the 2.99% support level to hold for it to maintain its range since mid-February. The 2s-10s curve sits at 1.46% after 10-year swap yields closed up 2bps.

The yield on NZGB23s closed up 2bps at 4.27%. The DMO announced the tender for today at 100m of 19s and 23s.

Overnight, market sentiment soured.  A Spanish auction sold €2.59b of bonds, closer to its minimum plan than maximum target of €3.50b.

The 5-year bonds were sold at an average 4.32%, up from 3.38% in an auction just over a month ago. The market has become increasingly concerned about Spain since it recently revised up its deficit forecasts for the year.

In a turn of the tables, Spanish 10-year bond yields at 5.69% are now higher than Italian equivalents (5.37%).

In this backdrop “safe haven” German bonds were in demand. The yield on 10-year bonds slipped from 1.86% to 1.80%.

Consequently, spreads of peripheral European bonds to German equivalents spiked higher. For example Spanish-German 10-year spreads moved from 364bps to 390bps.

US 10-year yields also fell from their previous day highs that had been inspired by the release of US Fed minutes. Yields declined from their highs around 2.30% to trade around 2.24% currently.

Given the moves seen overnight, expect the NZ curve to flatten with downward pressure on long-end yields today.

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2 Comments

German bonds I would buy..the rest are shite.

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The Euro has now entered the 'water boarding' phase of its evolution, this will last some years. The shape of this Euro animal may well change during the torture process, but it will survive.

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