Spanish-German 10-year bond spreads rise to new highs of 610 bps

By Kymberly Martin

NZ yields closed virtually unchanged across the board on Friday, in keeping with very quiet trading all week.

Having fallen from early July highs, short-end yields continue to price around 15bps of RBNZ rate cuts by a year’s time.

Markets appear to be awaiting their next catalyst. Locally, there is not too much on the immediate horizon.

Thursday’s RBNZ meeting will likely maintain the tone of the June MPS, with little to challenge market pricing.

However, moves seen offshore on Friday may provide the impetus for a further down-leg in yields today. 

Friday was all about Spain. As fears of spiralling debt issues took hold, Spanish bond yields broke to new highs. 10-year bonds rose 25bps to 7.27%.

Spanish-German 10-year spreads rose to new highs of 610bps, as German bonds remain in demand. German 10-year bond yields currently sit just above their all-time lows, at 1.17%.

US 10-year ‘safe haven’ bond yields dropped 6bps to find support once again at their all-time lows around 1.44%. A break of these lows will be the key to watch this week.

If US long rates were to make new lows this would likely drag down the NZ curve, particularly at the long-end.

This is the key risk to our view that the NZ 2s-10s swap curve will steepen in the near-term. At Friday’s close, key support was continuing to hold, close to 100bps.

Aside from the news-flow from Europe, key influences to watch this week will be the global array of PMI data releases.

Will they fall further into contraction? Wednesday’s AU Q2 CPI data will be important for informing market expectations for the RBA cash rate. Consensus expects a 1.9%y/y outcome for CPI.

The market prices 100bps of further RBA rate cuts for the next 12 months. We still see this as too aggressive, and our NAB colleagues do not expect a cut at the August 7 RBA meeting.