Global safe haven bonds sold off as more positive sentiment returns to markets

By Kymberly Martin

NZ yields slid a little further on Friday. Swap and bond yields closed down 3-5bps. Global ‘safe-haven’ yields crept up supported by slightly better sentiment.

NZ 2-year swap yields closed down 3bps on Friday. Now sitting at 2.63%, support is eyed at 2.55%.

Markets are now pricing that the OCR will be around 17bps lower in a year’s time. We do not expect rate cuts, but near-term there is no obvious catalyst to reverse market pricing.

This week, aside from the normal drivers of global risk appetite, the key influence on the short-end of the NZ curve will be tomorrow’s CPI release.

The market and ourselves see annual inflation dropping to a 1.1-1.2% level from 1.6% previously. This headline would likely make the market comfortable with current OCR pricing, extrapolating a contained inflation trajectory. However, we are mindful that after CPI bottoms in Q3 this year (on our forecasts) inflation will build into next year.

The 2s-10s curve is sitting right on the critical support level of 100bps. Support around this level is likely to be maintained in the absence of US 10-year yields falling to new lows. This would then drag down NZ long yields also.

In this regard, US and German ‘safe-haven’ 10-year yields managed to rise on Friday. They inched up to 1.49% and 1.26% respectively. They are now a little way off their all-time lows of 1.44% and 1.13%.

NZ-US 10-year bond yield spreads have narrowed to 180bps.

On Friday night, Moody’s downgraded Italy’s sovereign rating by two notches to Baa2 from A3. Despite this, Italy still managed to successfully auction sovereign bonds at lower yields than it paid in mid-June.

As well as data releases this week, key global influences to watch will be Fed Bernanke’s delivery of the Monetary Policy Report on Tues/Wed. Also Thursday will bring a Spanish bond auction, as a test of whether it can replicate Italy’s ability to fund itself.