Bernanke focusing on negatives of US economy and the "unsustainable" fiscal situation

By Kymberly Martin

It was a very quiet day in NZ markets. Yields closed virtually unchanged. The market continues to price 17bps of RBNZ rate cuts by 12 months time.

By contrast, we expect the RBNZ to begin its gradual rate hiking process in H1 next year. Still, no near-term catalyst is yet in sight to change market views. We suspect next week’s RBNZ meeting will deliver a fairly neutral statement, that will do little to shift market pricing.

Overnight, in an auction of 2-year German notes the average yield fell into negative territory for the first time, as demand for ‘safe’ investments continues. US and 10-year yields drifted back toward their lows, now at 1.47% and 1.20% respectively.

Demand for US Treasuries remained solid as Bernanke made his second day of testimony to the House. He appeared to place more emphasis on the negatives of the economy and that the US fiscal situation was “unsustainable”.

Overnight, a report showed Spanish bank bad loans climbed in June to an 18-year high. Spanish-German 10-year bonds yields spreads widened by 17bps, taking them to new highs at 576bps.

With the current focus on Spain, tonight’s Spanish bond auction will be a critical event to watch. The US Philadelphia Fed survey of business conditions will also be important in influencing market sentiment.

Given the overnight moves expect NZ yields to open under downward pressure today. We will also have the weekly DMO bond tender this afternoon. $100m of NZGB19s and $150m of NZGB23s are on offer.