By Kymberly Martin
Yields closed a little higher on Friday. Demand for global “safe haven” bonds remained high on Friday night.
NZ swap yields closed up around 2-3bps on Friday. On the week they were up 5bps at the short-end and 10bps at the long-end. Nothing has really changed regarding cautious market sentiment, yields still seem to be finding support just off their lows. Real money demand for hedging at historic low levels appears to be helping yields stabilise. However, the market still prices almost 50bps of rate cuts by year end. We do not expect rate cuts.
Bond yields similarly closed up 2-3bps. However, despite the current depressed yields on NZ bonds, demand at last week’s DMO auction was solid. The 200m of bonds attracted an average 2.44x bid-to-cover ratio. Demand for NZ bonds remains supported by their spread to offshore counterparts. e.g NZ-AU 10-year yields spreads at 37bps.
On Friday night, US and German “safe haven” bonds remained squarely in demand, as European concerns remain forefront. A key headline to catch the markets eye was Spain’s Catalonia region needs Government help. There was also the usual banter between European officials on the merits or otherwise of Eurobonds. German and US 10-year yields slumped to 1.37% and 1.74% respectively. Spanish-German 10-year bond yield spreads rose 17bps to new highs at 494bps.
Tonight, Italy returns to the market to sell Government bonds. This will be a good test of current appetite for European sovereign risk. On Wednesday this week, the Eurozone consumer confidence indicator will be released.
Likely it will stand in contrast to Friday’s US U. of Michigan consumer confidence survey that rose to its highest level since late 2007. There are no NZ data releases today. The key local release this week will be the NBNZ business confidence survey on Thursday.
All up, European sentiment will likely be the key driver of the local market this week. Swap yields will continue attempting to consolidate at low levels, as real money interest in fixing offsets general market malaise.
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