Spain progressing toward requesting support from ECB and European rescue fund

By Kymberly Martin

It was another relatively quiet day in NZ markets yesterday. Overnight, global ‘safe haven’ bonds sold off.

NZ swap yields closed up 2-4bps across the curve yesterday. 2-year yields closed at 2.71%, which we consider to be about mid-range at present.

The market still prices almost a 50% chance of a 25bp RBNZ rate cut by year end. We do not expect cuts.

The 2s-10s swap curve steepened a fraction further yesterday to 113bps. As we stated earlier in the week, we believe NZ curve direction will be increasingly dependent on moves in US long yields.

In this regard, US 10-year bond yields got a boost from the better-than-expected retail sales data (0.8% vs. 0.3% expected).

Yields now sit at 1.72%, their highest level since late May. We see the next support level for 10-year bonds at 1.80%.

In the meantime, the rise in US yields should only add to near-term steepening pressure on the NZ curve.

European data overnight was generally quite benign. German 10-year bond yields rose from 1.42% to 1.47%.

Rumours Spain is making progress toward requesting support from the ECB and the European rescue fund (with the conditionality that would entail) supported peripheral European bonds.

Spanish 10-year bond yields inched down a further 10bps to 6.7%.

There is an array of US data releases again tonight that have the potential to inform direction of US 10-year yields: the Empire Manufacturing index, CPI, industrial production and NAHB housing market index.