by Kymberly Martin
There were modest moves in swaps on Friday, but large downward shifts in bond yields.
Swap yields closed down 2-3bps, as the market consolidated its views post Thursday’s RBNZ meeting. The market prices around 5bps of OCR cuts in the year ahead.
2-year swap yields closed at 2.75%, having bounced off intraday lows. Key support is now seen just below 2.70%. The 2s-10s swap curve maintained its recent steepening, finishing the week around 138bps.
The more interesting developments came in the NZ bond market. Despite the substantial 900m offering, the bonds attracted a healthy 3.2x bid-to-cover ratio. The 17s saw a substantial 5.25x ratio. After the tender, bonds rallied into the close, with yields closing down 7-11bps on the day.
Yields are heading back toward their lows at the beginning of the year, aided by NZ bond spreads to their offshore counterparts. While these are narrowing, they remain at the upper end of their ranges. NZ-US 10-year bonds spreads sit at 204bps and NZ-AU equivalents at 33bps. We expect further narrowing of these spreads.
Italy successfully sold bonds on Friday night, in the wake of rating agency S&Ps downgrade of Spain’s sovereign rating from A to BBB+. Italy successfully sold €5.95b of bonds, but at 60bps higher yields than a month ago. Over the weekend there were widespread protests in Spain to austerity measures, keeping European troubles firmly in focus this week.
US 10-year yields crawled up slightly from 1.89% to 1.93% on Friday evening, showing little reaction to US data releases early Saturday morning.
There is no shortage of events to impact markets this week. Today, the key release in NZ will be the NBNZ business survey. We expect this may show some softening after the heady height activity expectations have reached in recent months.
Tomorrow, all eyes will be on the RBA meeting. Elsewhere, various PMI manufacturing releases will give a sense of the health of the global manufacturing sector.
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