By Kymberly Martin
It was another relatively quiet day in NZ markets as yields inched a little higher. Overnight, market sentiment soured.
NZ swap yields closed up 2bps at the short-end, and down 2bps at the long-end.
The 2s-10s curve has flattened back to just above key support at 128bps. Markets are no longer quite as aggressive in pricing RBNZ rate cuts in the year ahead. However, around 30bps of cuts are still priced by 12 months time. There is a 35% probability priced for a cut at the June meeting.
We do not expect a cut. 5-year swap yields are now 17bps off their lows of a fortnight ago, but still offer attractive hedging opportunities in our view.
NZ bonds yields closed up 3-4bps across the curve yesterday.
As US 10-year yields have continued to slump the NZ-US 10-year bond yield spread has risen to 198bps, the middle of its 180bp-220bps range.
NZ-AU 10-year yield spreads have blown out to 54bps. The bid for Australian bonds remains strong from global investors who own around 80% of issuance, and desperately seek relative ‘safe’ yield in uncertain times. Given NZ’s lower credit rating, lower liquidity and greater issuance requirements, AU bonds have faced greater demand than NZ equivalents. However, spreads at current wides should help support demand at today’s NZ DMO auction. A sizable tender of 200m of NZGB19s and 100m of 23s is on offer.
Overnight, ‘safe haven’ 10-year US and German bond yields slumped to even lower lows, at 1.62% and 1.27% respectively. Italy did manage to auction €5.73b of bonds overnight. But 10-year bonds yielded 6.03% up from 5.84% at the last auction a month ago. The price of insuring against Spanish sovereign default rose to the highest level on record.
Today, the NBNZ business confidence survey will be released. Given the current tone in markets, a fall today will likely only fuel the negative mood, despite the elevated starting point. NZ yields will likely open under downward pressure today.
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