By Kymberly Martin
There was very quiet trading on Friday. Yields closed down. On Friday night, US non-farm payrolls disappointed.
NZ swap yields closed down 3-4bps. At 2.77%, 2-year swap yields have pulled back from key resistance levels. In the near-term the path of least resistance for yields is downward. As previously highlighted, the immediate risk is for markets to reprice RBNZ rate cuts as latent global optimism fades. At present the market looks for the NZ OCR to be virtually unchanged in a year’s time.
On Friday night, US and German ‘safe-haven’ yields fell sharply after the release of disappointing US payroll figures. 10-year yields fell to 1.55% and 1.32% respectively, though still a little above their early June lows. The spread of non-core European bonds to German equivalents widened. Spanish-German 10-year bond yields surged more than 20bps to 563bps, close to their mid-June all-time highs.
After the rally in US bonds, the NZ-US 10-year bond spread now sits at 198bps, the upper end of its recent range. There is room for this spread to narrow, if risk appetite remains muted in the week ahead. NZ 10-year bond yields, at 3.51%, are still fairly attractive on a global basis, and relative to AU equivalents.
Global sentiment is likely to be the dominant driver of markets this week. However, Tuesday’s NZ QSBO survey will be important. Much EU ministers and Fed speak is scattered through the global calendar this week. Industrial production reports will also be important. Friday’s Italian bond auction will be a good barometer of current appetite for European sovereign risk.
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