by Kymberly Martin
NZ bond and swap yields opened down but clawed back someway during the day. Overnight, German “safe haven” bond yields fell to record lows on weak Eurozone data.
After opening down heavily, NZ swap yields clawed their way higher on the day to close down just 1-3bps.
NZ 2-year closed at 2.70% just above critical support levels. As the market absorbed the news of the RBA’s 50bps rate cut, it has increased its expectations for RBNZ rate cuts slightly, to 8bps in the year ahead. The 2s-10s swap curve steepened a fraction to 140bps.
NZ bond yields also opened down, but later in the day some profit taking in AU bonds saw NZ bonds also sell off a bit. Yields ended the day down 3-4bps.
The yield on NZGB 23s closed at 3.90% still some 27bps above AU equivalents and 199bps above US 10-year yields.
We expect further narrowing of these spreads, which should help support demand at today’s DMO auction. A relatively modest offering of 125m 17s and 125m 23s has been announced compared to last week’s outsized 900m offer.
The LGFA tender went well. The 20m of 15s were almost 3x bid and the 120m of 17s attracted a 6.6x bid-to-cover ratio. The yield on the 17s still sits just over 100bps above NZGB equivalents.
Overnight, German 10-year bond yields fell to record lows around 1.60%. This occurred after data showed Eurozone unemployment rose to 10.9% in March, and manufacturing shrank for the ninth month in a row in April.
Spanish spreads to German “safe haven” bonds widened, perhaps in anticipation of tonight’s auction. Tonight, Spain returns to market to sell bonds. This will be a good barometer of current sentiment toward European risk.
US 10-year yields stabilised around 1.92% after slipping on a weaker than expected US ADP employment report for April (119k vs. 170k expected).
Tonight, the ECB announces interest rates. Although widely expected to keep rates at 1% the market will dissect comments related to the state of the economy and for hints of further LTRO action.
Today, we get NZ employment data where we expect the unemployment rate to remain at 6.3%.
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3 Comments
The LGFA tender went well. The 20m of 15s were almost 3x bid and the 120m of 17s attracted a 6.6x bid-to-cover ratio. The yield on the 17s still sits just over 100bps above NZGB equivalents.
And both issues yield way through interpolated swaps - What's the credit implication, if any, given that swaps are stacks of FRA's - a credit sensitive instrument?
My view is that that these instruments will eventually fall under the umbrella of NZDMO/Government liability status - just as Freddie Mac and Fannie Mae did in the States.
They must be a good buy if my hunch turns out to be true and others (Fundies) keep buying them.
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