By Kymberly Martin
NZ yields were whipped around a bit yesterday by ongoing European turmoil and the release of CPI data across the Tasman.
However, at the end of the day swap yields closed down a relatively modest 2-4bps. 2-year swap yields closed at 2.55%.
The market prices around 20bps of RBNZ rate cuts by 12 months’ time. We expect today’s RBNZ meeting will reiterate its previous fairly neutral near-term stance.
It is unlikely to provide too much to challenge current market pricing.
NZ bond yields also closed down around 2bps across the curve. 10-year bond yields have made new lows closing at 3.23%.
Still, with the recent trickle lower of US bond yields, the NZ-US 10-year bond yield spread is still fairly mid-range at 181bps.
The NZ-AU 10-year spread is at the upper end of its range at 43bps. On a relative basis we now prefer the long NZ bond position as we expect this spread to narrow near-term.
Market sentiment appeared to stabilise a little overnight. Comments from ECB’s Nowotny regarding giving the European Stability Mechanism a banking license helped calm a market exhausted with bad news.
US and German ‘safe haven’ 10-year bond yields ticked up a little to 1.41% and 1.26% respectively. Spanish 10-year bond yields fell 25bps from their highs, to 7.38%.
This morning, the local focus will be on the RBNZ meeting. Tonight, look out for Italy selling bonds and US durable goods and pending home sales.
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