NZ swaps closed down 2-9 bps yesterday with notable flattening of the curve.
US 10-year yields trade at 2.35% this morning, having touched 2.40% intra-night.
As the NZ market was the first to open yesterday following Greek developments over the weekend, there was an element of price discovery in early trading. The long-end of the curve felt the brunt of the moves. At one point NZ 10-year swap was down around 13 bps from Friday’s close. But it inched its way higher in the afternoon to close down 9 bps, at 3.86%.
Similar moves were seen in long-dated NZGBs. However, when the US Treasury market opened around midday (NZT), US 10-year yields were 17 bps lower than Friday’s close, at 2.30%. This saw some widening of NZ-US long-end spreads yesterday afternoon.
The short-end of the NZ curve continues to price around 50 bps of cuts from the RBNZ i.e. that the OCR will reach 2.75% within the year ahead. This seems a fair reflection of risks at present. We expect a next cut on July 23. NZ 2-year swap closed down just 2 bps, at 3.08%.
There was little trading in the NZ credit market yesterday to give a sense of whether spreads were markedly impacted by the weekend’s events. However, overnight, most measures of risk appetite, including credit spreads were quite stressed.
As European equities fell heavily, iTraxx CDS indices (measures of hedging against credit default) pushed sharply wider. For example, the iTraxx Europe crossover index (a measures of sub-investment grade credit) widened by 17%, to its highest level since early-Jan. Greek 10-year bonds now trade at 15%. Italian-German 10-year spreads have spiked from 123 bps to 160 bps, their highest level since early-Nov last year. These are the measures of contagion the ECB will be watching closely.
Despite these moves, German and US 10-year bonds both sold-off from their early-evening lows on yield.
From 2.30%, US 10-year yields briefly traded above 2.40% ahead of slightly disappointing US pending home sales data. Subsequently, yields have drifted down to sit at 2.34% this morning.
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Kymberly Martin is on the BNZ Research team. All its research is available here.
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