By Kymberly Martin
NZ swap yields opened higher on the back of continued buoyant global sentiment. In the afternoon however, yields drifted lower. 2-year swap closed down 3bps at 2.84%.
As 10-year yields held onto some of their rise, the 2s-10s curve steepened noticeably. It now sits at 105bps. We continue to expect further steepening, particularly if US 10-year bond yields take another leg higher.
The DMO announced the offer for today’s auction at $100m of NZGB 19s and $150m of NZGB 23s. This is in line with its goal of making weekly bond offerings more consistent.
Given current funding demands this means around $250m a week. Demand at the past couple of auctions has been tepid. It will therefore be interesting to see demand levels today now that NZGB 23 yields are more than 40bps above their late July lows.
Demand should be assisted by NZ-AU and NZ-US 10-year spreads that sit at 33bps and 202bps respectively.
Overnight, the mood was a bit more mixed. German ‘safe haven’ bonds were in demand after a generally weak tone in European data releases. 10-year yields fell from 1.48% to 1.42% currently.
US yields by contrast continued their ascent, trading up to 1.64%, back toward the upper end of their June range. An auction of US 10-year note received the weakest bid-to-cover ratio (2.5x) since August 2009. This suggests diminished demand for the worlds ‘safest’ assets. A break above current ranges on US 10-year yields would open the way for a rise to 1.80%, likely dragging NZ long yields higher.
Today, given relative calm in the global backdrop the market may respond to the Q2 NZ employment report. We expect a 0.4% advance in employment to take the unemployment rate down to 6.4%, from 6.7%.
Market expectations are for a 6.5% outcome. An outcome in line with our expectations may nudge short-end yields slightly higher. Currently, the market sill prices only around 5bps of rate hikes from the RBNZ by a year’s time.
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