By Kymberly Martin
NZ swap yields closed down 2-5bps across the curve with a flattening bias yesterday. This was driven by offshore rather than domestic events.
The previous night’s weak US ADP employment report had set the tone. During the day, a weak AU building approvals number then saw the market ratchet up expectations for RBA rate cuts.
This dragged down AU yields, with NZ yields moving in sympathy.
The market now prices almost 60bps of rate cuts from the RBA in the year ahead and less than 5bps of rate hikes from the RBNZ.
The 2s-10s swap curve closed at 96bps. Since mid-March the curve has flattened from above 125bps in the backdrop of the strong rally in US long bonds; solid demand for constrained long-end NZGBs supply; steady Kauri issuance that has seen receiving demand against little corporate paying demand for long-end swap. We would look for some curve steepening from here.
Yesterday, the NZ DMO’s auction of NZ$200m of inflation-indexed bonds was not as strong as previous events. The bid-to-cover ratio was around 2x with a number of bids being well wide of market levels.
After last night’s ECB announcement German 10-year yields dropped to within a whisker of last year’s all-time lows, at 1.16%.
Peripheral spreads to German bonds inched lower. Spanish-Italian 10-year bonds spreads narrowed to 290bps, their lowest level since October 2011.
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