Italian yields recover as markets hopeful Monti will still have role in politics going forward

By Kymberly Martin

NZ swap yields closed little changed yesterday. The market continues to price around a 35% chance of a 25bps RBNZ cut by mid next year. 2-year swap yields remain at 2.74%, with the 2s-10s curve 108bps steep.

The NZ Half-Yearly Economic and Fiscal Update was published yesterday. The Government’s bond issuance program from now until June 2016 has been revised up by $6.5b relative to its earlier forecasts.

Gross issuance in 2013/2014 is still set to fall to $10b from $14b in 2012/2013, as previously forecast.

For Q1 2013, weekly bond issuance will drop to $200b from $250b in 2H 2012. In addition, one auction every month will consist entirely of $200b of inflation-indexed bonds. The DMO reiterated its goal that IIBs outstanding will reach 10-20% of total, over time.

In effect therefore, nominal bond issuance will drop from around $1b/month in 2H 2012 to $600m/month in Q1 2013. This should help keep a cap on NZ bonds yields as supply/demand dynamics are likely to relatively tight.

However, on the new schedule, it will not be until 2017 that net market bond issuance is notably negative. i.e. market bond maturities will exceed new issues.

In the backdrop of broadly positive risk appetite overnight, global ‘safe haven’ bonds sold off. US 10-year bond yields pushed above 1.81% before settling around 1.80%. Yields are now not far from the top of the 1.55%-1.89% range that has contained them for the past five months.

In Europe, peripheral spreads narrowed. Italian-German 10-year bond spreads are back at nine month lows. They have quickly recovered from their spike higher after P.M Monti announced his resignation. The market remains hopefully he will in fact play an ongoing role in Italian politics.

Today’s NZ current account data we expect will show the deficit steady around 4.9%/GDP, but heading beyond 6.0% next year. For now, the data is unlikely to garner much of a market response, but the trend will be closely watched by rating agencies in the year ahead.

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