by Kymberly Martin
In contrast to some sharp moves in recent days, NZ markets were fairly quiet yesterday.
Swap yields closed little changed. The 2-year sits at 2.51%, a little above its early May lows.
The market now prices around 30bps of RBNZ rate cuts by the end of the year.
The 5-year swap sits close to its all time lows at 3.08%. Current swap yields are consistent with an OCR that remains at, or below, 2.50% until mid 2014, and that eventually peaks at 3.50% in around four years time.
We believe that the OCR will be higher than this over the period. We therefore see value in hedging interest rate risk at current low yields. We continue to believe it is unlikely the RBNZ will cut interest rates.
NZ bond yields closed down 1-2bps, at historic lows. The DMO auction for today has been announced at 200m of NZGB23s. In light of insufficient demand at last week’s auction the DMO appears to now be targeting the long end of the curve. Here, yields are at historic lows, but are still the highest yield on the curve (NZGBs at 3.63%).
In addition, these NZ 10-year bonds yield 41bps more than AU equivalents, which should help support demand. This is particularly relevant given a high proportion of NZ Government bonds are held by offshore investors – as reinforced by yesterday’s news foreign holdings of NZGBs had picked up from 61% to 62% in April.
Overnight, the US FOMC released its minutes. They showed that “several” members suggested additional monetary policy accommodation could be necessary if the economy lost momentum.
They also confirmed they would continue “Operation Twist” (selling short-dated bonds to buy longer-dated bonds) until fruition at the end of June.
US and German “safe haven” yields showed only limited response to the minutes returning to trade around 1.76% and 1.47% respectively. German yields sit near historic lows.
Spanish-German bond spreads remain close to their widest levels as we approach a Spanish bond auction tonight. This will be an important test of appetite for European sovereign risk as uncertainty reigns in the lead up to Greece’s re-election on June 17.
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