By Kymberly Martin
The bounce in NZ yields proved short-lived, as yields declined across the curve yesterday. Overnight, risk appetite was battered further, and ‘safe haven’ US and German bonds were in high demand.
NZ swap yields slumped again, but remain above last week’s all-time lows. As 2-year yields fell 6bps while 10-year yields fell 2bps the 2s-10s curve steepened to 138bps. The short-end of the curve prices 50bps of RBNZ rate cuts by year end.
NZ bond yields followed their AU counterparts lower, but with little trading yesterday. Yields closed down 4-5bps. NZ-AU 10-year bond yields spreads narrowed a little further to 33bps.
There was a clear ‘risk off’ mood overnight, as the market appears sceptical of any material progress in the most recent Euro officials meeting. Contingency plans for a Greek exit from the Euro are now openly being discussed.
In this backdrop, German and US ‘safe haven’ bonds remained in demand. US 10-year yields slumped to 1.72% and German equivalents found new lows around 1.38%.
Non-core European bond yields surged higher. Spanish-German 10-year bond spreads rose 20bps, to 482bps, back toward their highs.
Today, all eyes locally will be on the release of the NZ budget. The path toward surplus in 2014/15 is expected to be maintained, suggesting no change to the Governments previously announced bond issuance program. Friday’s
DMO bond auction will be interesting to see if there is genuine demand for NZ bonds at these low yields.
Outright NZ yields are not very attractive, though their spread to AU counterparts should underpin some global demand. Given moves overnight, NZ yields will likely open downward pressure today.
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