German bonds march towards their June lows as investors seek safety

By Kymberly Martin

Once again NZ yields were little changed yesterday. Fed minutes released this morning provide little unexpected.

The yields on 2-year swaps remain at 2.70% and the market continues to price around 10bps of RBNZ rate cuts by a year’s time. NZ data to be released today (BNZ PMI, Food prices and ANZ consumer confidence) are unlikely to be catalysts to change this view.

The biggest news yesterday was a strong LGFA tender that attracted an average 3.8x bid-to-cover ratio. The 2019s went at an average yield of 4.10%, or at swap+71. The market had them marked at swap+74 pre-tender.  We suspect that as liquidity in these bonds continues to build spreads should narrow further, given the global search for relatively ‘safe’ yield.

Today’s DMO tender was announced at 110m of NZGB 17s and 150m of NZGB23s. Given the current spread between NZ bond and swap yields, and NZ-US and NZ-AU bond spreads, we expect demand should be solid.

The FOMC minutes, were released early this morning. They reiterated earlier comments that the committee stands ready to take additional steps if required, without providing much that was new. 

“A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment” and to meet inflation goals.

Members also said risks from Europe had increased and that “US fiscal policy would be more contractionary than anticipated”.

Despite a bit of volatility ahead of the minutes US 10-year yields essentially paddled sideways at 1.50% overnight. German equivalents drifted lower to 1.27%, seemingly on route back to their lows of 1.13% achieved in early June. However, non-core European spreads managed to narrow.