More flattening expected on 'safe haven' moves. Pessimism grows over Greece

By Kymberly Martin

NZ swaps closed down 1-4 bps yesterday.

Overnight, US 10-year yields traded down from 2.31% to 2.22%.

Despite the decline in the Q2 QSBO, NZ short-end swaps were relatively steady yesterday. 2-year closed 1bps higher, at 2.95% while long-end swaps took their cue from the previous night’s offshore moves.NZ 10-year swap closed down 4bps, at 3.83%, taking the 2-10s curve back down to 88 bps.

Over the medium term we expect further steepening within a 75-115 bps range.

However, today may see a little further flattening, given the moves offshore overnight. ‘Safe haven’ US and German bonds were back in demand, as the state of Greek negotiations appeared grim. According to reports, Greece presented no new written proposals to a meeting overnight in Brussels. It has however promised to do so imminently.

Many involved in the negotiations expressed pessimism or scepticism that a solution could be found. References to the prospect of Greece existing without the Euro are become more frequent. Germany’s finance minister said “Without a programme there’s no possibility of helping Greece in the framework of the Eurozone”. Eurozone members seem increasingly concerned about ensuring solidity for the rest of the Eurozone project, by not setting a lenient precedent in their actions towards Greece. 

German 10-year yields have drifted down from 0.76% to 0.64%. US equivalents have slipped from 2.31% to a low of 2.18%, before returning to 2.22% currently.

Tonight, the market’s focus will be split between continued Greek headlines and the release of Minutes from the US Fed’s June meeting. Recall, at this meeting the Fed’s ‘dot point’ projections still suggested two rates hikes by year-end, somewhat more than market pricing.

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