By Kymberly Martin
NZ swaps and bonds pushed another 3-4 bps lower yesterday.
Overnight, US 10-year yields traded between 2.58% and 2.63%.
Continuing in the sentiment inspired by RBNZ Governor Wheeler the previous day, NZ swaps pushed lower.
NZ 2 and 5-year swap now sit at 3.94% and 4.41% respectively.
There is steady rather than strong paying demand from the SME sector and mortgage book.
Meanwhile, offshore investors appear happy to receive NZ rates on the expectation the RBNZ will not deliver, even much-reduced OCR hike expectations. At current levels, even accounting for the risk of a pause soon in the OCR hiking cycle, we see value in hedging over a 2-4-year timeframe.
Meanwhile, the yield on NZGB23s has dipped even lower to 4.28%. Limited supply is a key issue assisting the rally, in addition to the rally in bonds offshore.
In this regard, next Friday’s DMO auction of $200m of nominal bonds will be of interest. Also the DMO’s funding announcement in conjunction with next Thursday’s Budget will also be closely watched.
The upside surprise in yesterday’s AU employment report saw AU yields nudge higher. This resulted in NZ-AU 2-year swap spreads dipping toward the bottom of recent ranges, currently at 109bps.
Overnight, both the Bank of England and ECB announced interest rates. The BoE left rates unchanged without any surprise. While the ECB also left rates unchanged it managed to garner significant market response from its commentary. The ECB stated that despite its inaction this time, the governing council is comfortable with acting “next time”. First it wants to see staff projections that will come out in early June. German 10-year yields fell from 1.48% to 1.45% on the comments. The likes of Italian 10-year bond yields dipped almost 10bps, to new lows around 2.92%.
Meanwhile, across the Atlantic, an auction of long-dated US Treasury bonds attracted lackluster demand, given their strong recent rally. The yield on US 10-year yields traded between 2.58% and 2.63%, sitting around 2.60% currently.
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