Backdrop of rapidly rising yields proved a challenge for the latest auction of NZ government bonds

By Kymberly Martin

NZ yields closed up 12-15bps on Friday. On Friday night global ‘safe haven’ bonds continued their sell-off. NZ swap yields captured the post-Draghi-comments momentum on Friday. 2-year swaps rebounded 12bps to close at 2.70%.

The market now prices only around 10bps of rate cuts from the RBNZ by a year’s time.

The swap curve maintained its current flatness (2s-10s around 94bps) as the curve moved up largely in parallel.

In this backdrop of rapidly rising yields it proved a challenge for the DMO to auction the $250m of bonds it offered. The $100m of NZGB19s attracted a very modest 1.4x bid-to-cover ratio.

The $150m of NZGB23s failed to attract sufficient bidders. Only $90m of bids were offered, and the successful range of bids was quite wide.

The general pattern of diminished appetite for ‘safe’ government bonds continued on Friday night. German and US 10-year bond yields rose around 10bps to 1.40% and 1.54% respectively.

The release of US Q2 GDP that was soft, but slightly better than feared, contributed to the continued sell-off in US bonds.

Conversely, yields on peripheral European bonds continued to fall. Spanish 10-year yields traded down to 6.74% from 7.50% at the start of the week.

This week, global influences are likely to be more important than local data. Global central banks will steal the limelight, with the US FOMC decision on Wednesday, and the Bank of England and ECB on Thursday.

Also look out for an Italian bond auction tonight, and a Spanish auction on Thursday night.

The recent sharp rebound in NZ swap yields suggests corporate/local authority interest to pay swaps may push yields higher, toward early July highs. However, be wary of disappointment on global central bank action, or European headlines to quickly reverse sentiment, and NZ yields.