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Rush for risk aversion likely when credit markets open today.Markets caught out by rapidly moving Greek-ECB situation

Bonds
Rush for risk aversion likely when credit markets open today.Markets caught out by rapidly moving Greek-ECB situation

By Kymberly Martin

NZ swaps closed little changed on Friday. On Friday night, US and German yields pushed higher.

Markets seemed somewhat oblivious to the negative turn in the Greek crisis that was to then unfold over the weekend.

NZ 2 and 10-year swap ended the week at 3.10% and 3.95% respectively. The market prices around 45 bps of cuts from the RBNZ in the year ahead. It places around a 75% probability on a cut at the July 23 meeting. We expect a cut at that meeting.

US and German yields pushed higher on Friday, taking US 10-year yields back toward their highs for the year, at 2.48%, from early evening levels of 2.40%. The market may have been preparing in anticipation of another healthy US payrolls number this Friday morning (NZT).

However, the bid for ‘safe haven’ bonds will likely return today given developments in the Greek crisis over the weekend. Greece has abandoned talks, without agreeing a deal with its creditors. It has instead turned the ‘deal’ over to a national referendum, scheduled for July 5. This falls after its scheduled payment to the IMF on July 1.

Greece has subsequently announced its banks will not open on Monday, in order to avert bank collapse after the ECB took the decision to freeze its emergency lending to Greek banks at Friday’s levels. Greek banks will remain shut until at least after the July 5 referendum.

This remains a highly fluid and unprecedented situation.

As the NZ market will be the first market to open after the announcements over the weekend, expect significantly heightened risk aversion to be the theme domestically. This will likely mean that NZGBs do not sell-off to reflect Fridaynight’s moves in US Treasuries, and could even see a rally. Domestic credit spreads will likely be marked wider in anticipation of wider Aussie/European iTraxx.

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Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA

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