Weaker than expected Aussie building approvals, and better demand for latest DMO offering sees NZ bond yields fall

By Kymberly Martin

NZ yields closed lower yesterday. Overnight, global ‘safe haven’ bonds rallied.

NZ swaps continued their drift lower after yesterday’s NBNZ survey failed to provide any positive surprises.

Yields closed down 3-5bps and the curve continued flattening. 2-year swaps closed at 2.66%, moving toward the lower end of its 2.55% to 2.90% range.

At the lower end, more than 25bps of RBNZ rate cuts would be priced. Assuming no global meltdown, at this point we would look to pay swap, as we do not expect cuts.

NZ bonds rallied strongly yesterday, closing down 8-10bps. A couple of factors contributed. First, AU bonds rallied after a weak AU building approvals release, setting the tone for NZ bonds. Then, as expected, much better demand was seen at this week’s DMO auction. The $250m of bonds offered attracted an average 5x bid-cover ratio. NZ bonds then rallied strongly into the close.

Still, NZ bonds remain attractive on spreads to both AU and US equivalents. They also offer positive ‘carry’ relative to their peers.

Overnight, Italy managed to auction its maximum target of bonds at lower yields than at auction a month ago. The market remains optimistic the ECB will soon step in to buy the sovereign’s bonds if necessary.

However, peripheral European bonds spreads to German equivalents did not narrow, as German bonds rallied.

Data overnight showed Eurozone confidence on a number of measures remained expectedly subdued.

US data also showed a marginal disappointment on personal spending (0.4%m/m vs. 0.5% expected). German 10-year bond yields fell from 1.37% to 1.32%. US equivalents fell back to 1.61% as the market anxiously awaits tonight’s Jackson Hole gathering.