By Kymberly Martin
There was a mild market response to the RBNZ’s neutral statement yesterday.
Overnight, risk appetite soared. NZ swap yields edged slightly higher at the short-end after the steady RBNZ announcement yesterday.
It appears the market had been looking for a slightly more dovish tone. The market now prices around 16bps of RBNZ rate cuts by a year’s time.
The chance of a 25bps rate cut at the next meeting has been reduced to 33%.
The NZ swap curve flattened on the day as long-end yields conversely fell 2-3bps. The 2s-10s curve broke through key support to close at 93bps.
Renewed corporate interest to extend duration given curve flatness may now support the curve around this level. This is especially true as 10-year swap yields make new lows close to 3.50%.
Overnight, risk appetite surged after ECB President Draghi comments were taken by the market as a hint at purchases of struggling Spanish and Italian bonds.
Along with a massive rebound in European equity markets, Spanish and Italian 10-year bond yields fell 70bps and 40bps respectively.
As ‘safe haven’ demand fell the yield on German 10-year bonds climbed from 1.24% to 1.32%.
The reaction shows just how nervous and negatively positioned the market has become.NZ yields will likely open up solidly at the open given the euphoric moves seen overnight.
The DMO bond auction will take place today with 100m of NZGB19s and 150m of NZGB23s on offer. Then it will be all eyes on US Q2 GDP to be released tonight.
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