By Kymberly Martin
Yesterday the NZ market responded to the global sell-off in bonds. US 10-year yields held onto gains overnight.
NZ swap yields closed up 8-13bps across the curve yesterday. The biggest moves were seen at the long end as yields follow US 10-year yields higher.
The 2s-10s swap curve has broken higher to 118bps. We had targeted 115bps as the level to begin to take profit on the curve steepener.
We would taper positions from here, but continue to expect further steepening in line with the continued rise in US long yields. We target 130bps (the bottom of our fundamental ‘fair value’ range) as the level to look to reposition for curve flattening.
The bid-to-cover ratio at yesterday’s DMO picked up to above 3x. However, generally demand was still on the soft side. Many bids were at much higher yields than market levels. NZ bond yields closed up 10-18bps on the day.
Speculation Spain is moving closer to applying for ECB support dominated market talk overnight. Spanish-German 10-year bond spreads have narrowed to below 500bps.
US data was broadly a bit below expectation. However, given the market’s current upbeat mood it chose to focus on positive building permits data.
These rose 6.8% in July (1.2% expected) as a leading indicator of future construction activity. US 10-year yields have held onto their rise to 1.85%, their highest level since early May.
There are no local data of note today. US data will be back in focus this evening with the University of Michigan Confidence indicator. The market will also be keeping an ear out for further details of any Spanish rescue plan.
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