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Latest NZ Government bond auction over-subscribed suggesting last week's total flop was flash in pan

Bonds
Latest NZ Government bond auction over-subscribed suggesting last week's total flop was flash in pan

By Kymberly Martin

NZ yields closed up 2 to 6bps yesterday after some interesting intra-day moves. Overnight, ‘safe-haven’ US and German bonds remained in high demand.

NZ swap yields drifted higher yesterday morning. Demand to pay fixed rates, at current low levels, is pushing yields higher. There appears to be interest from small to medium sized businesses and corporates.

There also appears to be some retail demand given recent mortgage rate specials across the market. Offsetting this however, is some noted offshore interest in receiving swaps around current levels. Mid afternoon, the rise in swap yields was curtailed by the very well received bond auction.

Yields then rose a little further into the close. The yield on 2-year swaps closed up 4bps at 2.55%. The market still prices around 30bps of RBNZ rate cuts within a year’s time.

Yesterday’s DMO auction saw very solid demand, suggesting last week’s failed auction may have been a flash in the pan.

The 200m of NZGB23s attracted a 3.5x bid-to-cover ratio. These 11 year bonds were sold for a yield of 3.66%, down from 3.75% the previous week.

After the auction, yields on 23s that had previously been moving steadily higher, fell back ending the day up just 3bps. The NZ-AU 10-year bond spread has narrowed to 39bps but remains attractive, in our view.

Overnight, Spain managed to sell its maximum target of bonds. However, it came at a price. The yield on bonds maturing in July 2015 rose to 4.88% compared to 4.04% just two weeks ago. The spread between Spanish 10-year bonds and ‘safe-haven’ German equivalents rose to new highs above 490bps. German bonds continued to be in demand, as political uncertainty remains the key focus in Europe.

US10-year yields slipped toward all-time lows after the negative surprise on the US Philadelphia business survey early this morning (-5.8 vs. 10 expected). Yields currently sit around 1.70%.

With no key local or global data today, there is no relief in sight from the general gloom and nervousness in markets. Expect NZ yields to open under downward pressure, with a bias for curves to flatten on the day.

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