By Kymberly Martin
Following Friday’s souring in sentiment following the disappointing US payrolls number, NZ swap yields declined yesterday. The yield on 2-year swaps closed at 2.70%. In the near-term a further pullback is likely as the market reprices RBNZ rate cuts for the year ahead (10bps of cuts are currently priced).
We see support above 2.55%. The 2s-10s swap curve, at 102bps, is approaching key support around 100bps. Our central view remains for some near-term steepening of the curve ahead of a prolonged flattening we expect to unfold next year, as OCR hikes kick in.
It was a quiet day in NZ bond markets with yields also slipping 8bps. The Local Government Funding Agency announced its next tender for Wednesday 11th. $135m of 2019s and $10m of 2015s will be offered.
Given the significant premium these bonds continue to provide relative to NZGBs, in a ‘low yield’ world we expect demand to be solid.
As EU ministers met overnight it was a relatively contained trading session. US 10-year yields drifted a little lower to around 1.51% currently, while German equivalents paddled sideways around 1.32%.
Spanish-German 10-year spreads rose further to 574bps as Spanish yields touched the critical 7.0% level once again. Murmurs from the EU ministers meeting drifted out with respect to Spain being granted an additional year, until 2014, to meet 3% deficit target.
The local focus today will be the release of the Quarterly Survey of Business Opinion. Still, it will be unlikely to reverse the generally drift lower in NZ yields, driven by global dynamics, that appears to be the near-term pattern.
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