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NZ 2-year bond yields trading back at their 2011 lows

Bonds
NZ 2-year bond yields trading back at their 2011 lows

by Kymberly Martin

NZ swap yields closed up 4-6bps on Friday, on the back of real money interest in paying at these historic low rates. 2-year yields closed the week at 2.62%, back at their end of 2011 lows.

The market now prices around 14bps of RBNZ rate cuts in the year ahead. We do not expect any rate cuts. The 2s-10s curve has flattened to 134bps and we see strong support around these levels. We do not expect further flattening in the near-term.

Bond markets were quiet on Friday. Yields ended the week little changed despite the notable dip in yields mid week. The DMO auction this Thursday will be closely watched. Was last week’s poor demand a one off or a sign of things to come, given yields are still close to historic lows? A supporting factor for NZ bonds however, continues to be relative to spreads to AU equivalents. NZ-AU 10-year bond yield spreads sit at 50bps.

On Friday evening, “safe haven” US and German 10-year bond yields continued to bounce around close to their lows, at 1.84% and 1.52% respectively. As the market remains focused on European uncertainty it took little comfort from a better-than-expected US University of Michigan Consumer Confidence number (77.8 vs. 76 expected).

Given the market’s limited response to last weeks slip in the NZ PMI it is unlikely today’s release of the PSI will garner a strong reaction. More likely the market will remain focused on global developments. Tonight, Italy sells bonds, as a barometer of appetite for European sovereign risk.

Two important sets of central bank minutes will be released this week. First up, the RBA’s tomorrow. Comments may help influence pricing for RBNZ activity, given the market ramped up RBNZ rate cuts expectations after the RBA recently cut by 50bps.

On Wednesday, the US FOMC releases their minutes, which, as always, will be scoured for hints of further QE.

We expect NZ swap yields will continue to be supported by real money flows at these low levels. However, an obvious catalyst to push yields a lot higher is not yet apparent.

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