NZ long bond yields still appear attractive relative to global counterparts

by Kymberly Martin

It was a relatively quiet start to the week, with yields up 3-4bps from their end of week lows.

Swap yields appear to be finding some support after last weeks large falls. The 2-year yields closed up 3bps at 2.78%. The market continues to price 5bps of RBNZ rate cuts in 12 months time, and a 20% chance of a cut at the next meeting.  These expectations will ultimately be revised higher, in our view, though no immediate catalyst is looming. We therefore expect swap yields to consolidate at low levels for now.

Bonds saw little activity with yields closing up 3bps across the curve. Despite being low in absolute terms, NZ long bond yields still appear attractive relative to global counterparts.

NZ-US and NZ-AU 10-year bond spreads still sit at 208bps and 31bps respectively, despite some recent narrowing. This should help underpin demand for NZ Government bonds.

Data released overnight confirmed that Spain officially fell into recession in Q1, though the economy shrank slightly less than expected (-0.3% vs. -0.4%).

Non-core European spreads to “safe haven” German bonds were actually relatively stable.  All eyes will be on Spain again on Thursday when it returns to markets to sell bonds.

US 10-year yields were slipping lower early in the evening, given relatively muted risk appetite and negative equity market performance. They remained under pressure after the release of a disappointing Chicago PMI (56.2 vs. 60 expected). The PMI dropped to the lowest level since late 2009. US 10-year yields now sit just above 1.91%.

Today, the focus is on the RBA. AU short-end swap yields could bounce if a 50bps cut is not delivered.