By Kymberly Martin
There was little to report in NZ swap markets yesterday, apart from a slight further flattening of the curve. The 2s-10s curve is now back at 102bps, as the long end of the curve has followed US long yields lower.
The bond curve also flattened yesterday taking NZGB 23s back to 3.50%, but still same way above late July lows close to 3.20%. The DMO has announced its auction today at $100m of 19s and $150m of 23s.
Overnight, market attention turned to civil unrest in Spain. Attempting to address market perceptions that Spain is dithering on seeking aid, the Spanish PM stated he would “100 percent” seek a rescue package if borrowing costs stayed “too high”.
Overnight, Spanish 10-year bond yields leapt from 5.75% to 6.00%, though still some way below the 7.50% peak reached in late July.
As demand for ‘safe haven’ bonds resumed, German 10-year yields fell from 1.58% to 1.46%. This saw Spanish-German 10-year spreads spike 45bps higher.
US 10-year yields slipped to 1.62%. Despite decreasing risk appetite, we do not see US long yields revisiting their lows. The market now incorporates in long yields higher long-term inflation risk in the post QEIII world.
Locally, the NBNZ business confidence survey will be delivered, where we expect a slip from the average readings achieved in August.
However, the market will be driven more by the shift in overnight sentiment. Expect lower yields and a flatter curve.
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