By Kymberly Martin
Swap yields closed down 4-10bps yesterday, with a notable flattening of the curve. After the high-side reading on Q2 GDP the market initially moved to slightly pare back expectations of RBNZ rate cuts.
This was short-lived however, and short-end yields then drifted lower. 2-year swap yields closed at 2.70%. The market continues to price around 60% chance of a 25bps cut in the next 6 months. The 2s-10s curve flattened 6bps to 111bps on very thin volume.
As the short-end of the NZ curve will likely remain fairly range-bound given the RBNZ’s neutral stance in the year ahead, curve moves will likely be driven from the long end.
To this end, moves in AU and US long rates will be important drivers. Overnight, US 10-year bond yields traded down to 1.72% before returning to 1.77%.
Yesterday, the RBNZ’s new Policy Targets Agreement was announced, ahead of the new Governor taking the helm. The inflation target is now more specifically 2.0%, and there is now a requirement to monitor asset prices. This suggests a tilt toward a slightly more hawkish mandate.
Overnight Spain sold €4.8b of bonds, the most since January. The 10-year tranche was sold at the lowest yield since January. At 5.67%, it was a full percentage point lower than at the last auction, at the beginning of August.
The market’s patience may soon wear thin however, if Spain does not soon announce some concrete steps towards applying for a bailout package (with the conditionality that will entail).
The NZ DMO bond auction yesterday afternoon attracted sufficient if not stellar demand with 1.7x the bids required to cover the bonds offered. Bond yields closed down 2-4bps.
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