Spain successfully auctions almost €3bln of bonds, but at a price.

By Kymberly Martin

NZ yields closed little changed yesterday. DMO auction results were mixed.

NZ swap yields were relatively directionless yesterday before closing down 1-2bps. The market continues to look for around 15bps of RBNZ rate cuts by a year’s time.

Next week’s RBNZ meeting should provide little to challenge this view, when it presents a fairly neutral near-term outlook.

The 2s-10s swap curve remains well-supported at the 102bps level. We are positioned for steepening on this curve. We expect corporate interest to extend duration of hedges, due to current flatness, will aid this trade.

At the DMO bond auction the $100m of NZGB19s attracted a strong 4.3x bid-to-cover ratio. The $150m of NZGB 23s saw lesser demand with a modest 1.2x bid-to-cover ratio. Still the full amount was allocated.

Overnight, Spain successfully auctioned almost €3b of bonds, but at a price. It sold 2-year notes at 5.2% compared to 4.34% when last auctioned in June, and 5-year bonds at 6.46%.

Headlines also showed German lawmakers had agreed aid to Spanish banks by a large majority.  Spanish-German 10-year bond spreads widened further to a record 580bps.

German and US ‘safe haven’ yields were relatively contained overnight. German 10-year yields paddled sideways around the 1.22% level.  US equivalents inched up to 1.51%. They navigated the disappointing US home sales and Philadelphia Fed data early this morning, partly offset by some better-than-estimated S&P500 earnings results.

We expect NZ yields will likely end the week in the quiet manner they have traded all week, with little obvious seen to disturb them today. Then the market will be looking toward next Thursday’s RBNZ meeting.