Spain taking advantage of improved risk sentiment to auction more bonds

By Kymberly Martin

It was another fairly quiet day of consolidation in NZ markets yesterday. Yields closed down 1-2bps across the swap curve. Yields remain fairly mid-range as we head into today’s NZ GDP release.

Our expectation is that this reading may be marginally negative (-0.1%) compared to the consensus expectation of 0.4%.

If we are right, the market’s knee-jerk reaction would likely be to price in further RBNZ rate cuts, pulling short-end swaps lower. We believe this would be an over reaction however, as we continue to see sufficient strength in broad forward-looking economic indicators to suggest growth will resume.

Overnight, US and German ‘safe haven’ bond yields drifted a little lower. US 10-year bond yields have fallen back to 1.78% after peaking around 1.90% a few days ago, post the QEIII announcement.

The surge higher in yields and subsequent slip lower in the last couple of days appears to reflect changes in US inflation expectations.

‘Break-evens’ on US inflation-linked bonds suggest expectations for long-term US inflation soared in the wake of further policy easing. A little lower now, implied expectations for US inflation over 10 years sit at 2.56%. This is a little above the average achieved in the past decade.

Some time after October 1, the NZ DMO will re-issue NZ inflation-linked bonds. These should help provide a gauge of shifting inflation expectations in the NZ market.

Today the NZ DMO will auction $100m of NZGB 19s and $150m of NZGB 23s. This will be watched closely given erratic demand seen in recent weeks.

Tonight, Spain will return to markets to auction bonds, as a good barometer of current demand for European sovereign risk. Overnight, Spanish yields fell as PM Rajoy made comments which suggested his government was inching closer to applying for a bailout program.