By Kymberly Martin
Yields closed a fraction lower. Overnight, global ‘safe haven’ bond yields declined further from recent highs.
Yesterday’s DMO bond auction showed some improvement in demand after tepid bidding in recent weeks. The average bid-cover ratio was 3.1. NZ 10-year bonds yields closed down 3bps, flattening the curve slightly.
2-year swap yields continue to sit about mid-range at 2.72%. The market looks for the OCR to be about 5bps lower in a year’s time.
We do not expect rate cuts, but think it will be some time before we get a domestic catalyst to nudge yields out of their recent trading range.
Next week’s NBNZ business survey data should confirm we are on track for a modest growth pick up. Still, it may take until early next year for evidence that inflation is surprising to the upside.
The NZ 2s-10s curve flattened a little further to 116bps. We are now neutral the NZ curve.
The 2s-10s curve is still a bit below our fundamental ‘fair value’ range (130bps-150bps). But we see it struggling to steepen further in the near-term when US long yields (a key influence on the NZ curve) are no longer rising.
Overnight, US 10-year bond yields fell a little further from recent highs, to sit around 1.67% currently. Markets appear to be sobering up a little after their recent euphoria. German 10-year yields also fell from 1.41% to 1.37%, as the market awaits the next announcement in the arduous process of finding European solutions.
In the last couple of days, non-core European spreads to German bonds have also begun widening again. Spanish-German 10-year spreads have widened from 465bps to 496bps, a sign of simmering concerns regarding Spanish sovereign funding.
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