ECB hints at reviving sovereign bond purchase program

by Kymberly Martin

The NZ swap market was whipped around a bit by moves in the Australian market yesterday. However, yields closed down a modest 2-3bps.

The yield on 2-year swaps closed down 2bps at 2.94%. The market now prices just 11bps of rate hikes from the RBNZ in the year ahead. The 2s-10s curve closed at 135bps.

There is good support on the curve at this level so any dissipation in global concerns will likely prompt a steepening.

NZ bond yields closed little changed yesterday, despite some intraday volatility.

Across the Tasman, AU long bonds sold off, with their yields rising 9bps in the afternoon. This narrowed the NZ-AU 10-year spread which had become very stretched, to 28bps.

Still, at these levels further narrowing is expected. (the bottom of the range sits around -10bps). Today’s DMO tender was announced at 50m of 17s and 19s and 100m of 23s. The current gap between NZ and AU bond yields should help support demand at this tender.

Overnight, market sentiment improved somewhat, whilst remaining skittish. Sentiment towards Europe was boosted after ECB member Coeure hinted that the ECB may revive its sovereign bond purchase program to lower Spanish borrowing costs. The yield on Spanish 10-year bonds fell 9bps to 5.83%.

US 10-year yields clawed back from their previous day’s lows, in the backdrop of rising equity markets.

The release of the Fed’s Beige book early this morning stated “the economy continued to expand at a modest to moderate pace…”, and did nothing to dampen spirits.

The US 10-year yield currently sits at 2.03%.

Today, the NZ PMI will be released, along with NZ credit card spending data. Across the ditch, AU employment data is published today. Italy will also return to markets with a bond auction this evening, which will be closely watched given renewed market concerns regarding European sovereign funding.