NZ bond yields fall after announcement of NZ employment numbers

by Kymberly Martin

NZ yields fell heavily yesterday on the back of NZ unemployment data. Focusing on the headline fall in NZ unemployment to 6.7% from 6.3%, NZ yields fell sharply yesterday, continuing their descent of the past 6 weeks. 2-year yields closed at 2.60% near the lows of last November.

The market is now almost fully pricing a 25bps RBNZ rate cut by early next year. We continue to believe this is unlikely though our conviction has been sorely tested in recent weeks.

For now, it is difficult to see an immediate catalyst to turn market sentiment around. The 2s-10s curve steepened a little further yesterday (143bps) as 2-year yields fell 11bps and 10-year yields 7bps.

Bond yields also closed down 9-11bps yesterday. It was another solid DMO auction with a bid-to-cover ratio of 2.3x. Bonds continued their rally after the auction, with the yield on NZGB23s closing at 3.80%. The spread to US and AU equivalent bonds has narrowed to 193bps and 27bps respectively.

It was a whippy night for “safe haven” US and German bonds. The ECB kept rates at 1% as expected, but was possibly less downbeat on the outlook than expected. Yields surged higher by around 4bps. Later, yields were knocked back to their original level after the release of a disappointing US non-manufacturing ISM (53.5 vs. 55.3 expected).

Overnight, Spain was able to meet is maximum target of selling €2.5b of bonds. In its first debt sale since being downgraded by S&P last week, the sovereign had to pay 4.04% to sell 3-year debt, up from 2.62% in March.

Rumours also swirled that an announcement on ailing Spanish banks was also imminent. This will remain in focus today. In addition, the Eurozone Services PMI is released tonight. Look out for the RBA’s statement of monetary policy released today.