By Kymberly Martin
NZ yields slipped a further 4-5bps yesterday. As previously highlighted some receiving interest is likely returning to the NZ market.
This is unsurprising given how quickly yields have risen and that a fairly steep (if realistic in our view) path for OCR hikes is now priced for the year ahead. In addition ‘carry’ on receiving is now very attractive.
However, in the absence in a notable pull-back in US yields we doubt the pull-back in NZ swaps will extend too far.
Paying from the ‘real’ economy should be attracted to any dips. The 2-10s curve remains at its recent wides at 141bps.
Ahead of the US FOMC Minutes markets were fairly quiet overnight. US 10-year yields traded slightly higher within a 2.62-2.66% range.
The immediate response to the Minutes was for US yields to dip, with US 10-year yields dropping from the top, toward the bottom, of their range. However, this was soon reversed and yields now sit at 2.68%.
Overnight, Italian borrowing costs rose at an auction of 1-year bills after the previous day’s downgrade from rating agency S&P.
Italy’s long-term credit rating was cut to BBB from BBB+ and the outlook remains negative. However, Italian-German bond spreads remain relatively contained, having only widened from 268bps to 279bps in the past couple of days.
Tonight, Italy also issues longer-dated bonds which will be a good barometer of demand for the sovereign’s credit in the wake of the rating downgrade.
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