By Kymberly Martin
In relatively quiet trading NZ yields followed offshore yields lower yesterday. Overnight, the ECB, BoE and PBC all took steps to further ease monetary policy.
NZ swap yields closed down 4-6bps across the curve, with a slight flattening bias. 2-year swap yields have pulled back from key resistance levels to close at 2.79%.
They now appear to be trading back in the old 2.60%-2.85% range. The market now prices an unchanged NZ OCR in a year’s time, with a small chance of a near term rate cut.
The DMO bond auction was unspectacular. The 125m of NZGB19s attracted a modest 180m of bids. The 125m of NZGB23s fared a little better with close to a 3x bid-to-cover ratio.
Bond yields declined into the close (closing down 4-5bps) in line with swaps and declining AU yields. AU yields subsequently fell further, with AU 10-year yields subsiding from 3.17% to 3.09% yesterday.
As a consequence, NZ-AU 10-year bond spreads have widened toward the top of their range, at 47bps. Overnight, as expected the ECB cuts its main refinancing rate by 0.25% to 0.75%. It also cut its marginal lending rate by 25bps to 1.50% and its deposit rate by 25bps to 0%, presumably to encourage banks to lend to one another rather than leaving it with the ECB.
The Bank of England left rates on hold at 0.50% but announced a further £50b of asset purchases, taking the target to £375b.
Separately, the Bank of China also unexpectedly cut the one year lending rate by 31bps to 6% and the deposit rate by 25bps to 3%. Despite all these gallant efforts of further loosening monetary policy markets took little cheer.
US and German “safe haven” bonds remained firmly in demand. German 10-year bond yields slipped form 1.46% to 1.38%. US 10-year yields experience some volatility after the release of a stronger-than-expected US ADP employment report (176k vs. 100k expected). Still they have slipped to 1.59% having opened down after the Independence Day holiday.
Peripheral European spreads to German bonds have spiked higher. For example, Spanish-German 10-year spreads rose from 496bps to 539bps yesterday, back toward their highs.
Expect NZ yields to open down after the moves seen overnight. All eyes will then be on the US non-farm payrolls delivered tonight.
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