By Kymberly Martin
NZ swap yields followed a path of least resistance, lower, yesterday. The short-end of the swap curve has settled comfortably mid-range with 2-year just under 2.70%. The longer end of the curve drifted a bit lower, flattening the 2s-10s curve to 113bps.
NZ bond yields also drifted lower yesterday. Yields closed down 3-4bps. A number of factors suggest this Thursday’s DMO auction will not be as soft as recent weeks. First, NZ-US and NZ-AU 10-year spreads are attractive at 200bps and 44bps respectively. Second, swap-bond spreads are also relatively tight at 20bps.
It may also be the case that the local market has been caught a little short of long-end bonds. Finally, with the northern hemisphere trickling back from summer holidays it should help to support offshore demand for bonds (remembering that 63% of NZ bonds are owned by non-residents).
The market tone was generally a little cautious overnight. The Spanish region of Catalonia formally asked the Spanish government for €5b in funding. This can easily be met by the €19b the Spanish government has already set aside.
Still, the move reminded the market of the fragile balance in the region. Spanish-German 10-year bond spreads have been stealthily creeping higher in recent days. They now sit at 513bps, some 50bps above their lows of a week ago.
The market also has in its sights on an Italian government bond auction tomorrow night. Up to €7.5b are on offer. Meanwhile ‘safe haven’ German and US bonds continue to find some favour.
German 10-year bond yields now sit at 1.34% and US equivalents at 1.63%. US consumer confidence data overnight was softer-than-expected (60.6 vs. 66.0). US 10-year yields are now 20bps off August highs. We now look for resistance just below 1.60%.
There are no NZ data releases today. Tonight, the US Fed releases the Beige Book. It provides an assessment of the economy which will inform the Fed’s policy decisions. The market will continue to be in ‘wait and see’ mode going into Friday’s Jackson Hole meeting. Still, for now the path of least resistance for NZ yields continues to be lower and the curve flatter.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.