NZ Bond yields supported by better than expected Fonterra payout

By Kymberly Martin

There has been a small bounce in NZ yields this week as the market takes a small breather from European woes.

Yesterday, NZ swap yields closed up 3-5bps across the curve. The market has found support, given a slightly better tone in global risk appetite.

The Fonterra payout announcement that was also ‘less bad’ than expected, also assisted in propping up yields. The 2-year swap is now at 2.44% and 5-year at 3.03%.

The market still prices close to 40bps of RBNZ rate cuts by year end. We do not believe these expectations will be met.

Bond yields are also finding a little support, up 1-2bps yesterday. The yield on NZGB23s is now at 3.55%. NZ-AU 10-year bond yields spreads have narrowed a little further to 34bps. Further narrowing is likely in our view.

Overnight, US “safe haven” yields rose in the backdrop of rising equity markets. Little has fundamentally changed since last week in Europe so we are wary of extrapolating the current shift in mood too far.

For now, US 10-year yields have risen from 1.75% to 1.79%. German equivalents still languish close to all-time lows at 1.47%.

Markets were boosted by Spain’s successful auction of bills overnight (a normally routine event). There also appears to be some simmering hope of an announcement of additional measures to boost Europe’s economy from this week’s Brussels summit.

Spanish 10-year yields fell sharply from 6.28% to 6.08%, with Spanish-German spreads narrowing from 484bps to 461bps.

Today will bring a little attention to central banks and prospects for further quantitative easing. The Bank of Japan announces its target rate, and the Bank of England releases its monetary policy minutes.