NZ Govt bond values rise, yields fall as bond-swap spreads move back to more normal levels. Swap rates see downward pressure too

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Investors switching out of equities into the safety of the bond market has seen US Treasuries well bid, with the 10-year rate down 5 bps to 2.18%, trading close to the lows for the session.

The 2-year rate dipped just below the 1% mark and currently trades at 1.0%.

The Fed’s Fischer was on the wires claiming that 4 hikes in 2016 was in the ballpark, and noting that this was above the market expectations of only 2 hikes. However, he also acknowledged that China’s slowing economy and other sources of uncertainty made it difficult to predict the path of policy.

The NZ rates trading session saw further downward pressure on rates.

The 2-year swap rate was down 4 bps to 2.79%.

Recall that rates drifted higher towards the end of last year, as receivers stopped out of positions. With fundamentals back in play, rates are reverting back towards fairer levels.  Helping the cause is that mortgage and corporate paying flows are typically light at this time of year.

The government bond market had another good day, with the 10-year yield down 8.5 bps to 3.40% following on from the previous day’s 9 bp fall.

As noted yesterday, some of the move has reflected a catch-up from offshore post the holidays and illiquid market conditions.  However, some of the move will also reflect the behaviour of swap spreads over the last couple of months.  Recall that government bonds strongly underperformed swaps late last year, with the 10-year swap-government bond spread moving into negative territory, reflecting offshore behaviour. This move didn’t make a lot of sense and now we’re seeing a reversal of that move.  On generic rates, that spread got to as low as minus 3 bps towards the end of November and it is now back up to +23 bps.