UST 10-year yields rise sharply as risk appetite improves. Equities rise. NZ credit 'difficult' but rising spreads may bring reassessment

By Kymberly Martin

NZ swap and bond yields closed down 1-2bps yesterday.

Overnight, in the backdrop of improved risk appetite, US 10-year yields traded up from 1.74% to 1.84%.

The further decline in prices at the GDT dairy auction, combined with the previous day’s decline in the RBNZ’s inflations expectations survey, has kept the market in the mind to price further RBNZ rate cuts. Around 33 bps of cuts are now priced by Q3 this year.

Yesterday’s LGFA (Local Government Funding Agency) tender showed tepid demand. Overall the average bid-cover ratio of 2.5x was solid but there were a wide range of bids back from previously marked levels. It remains a difficult environment for NZ credit although LGFA-NZGB spreads are approaching levels where investors may begin to re-look at the name. LGFA-NZGB23s are now marked at around 88 bps, close to range highs.

Overnight, US yields rose along with a 6%+ rebound in the WTI oil price and general improvement in market sentiment.

Corporate CDS spreads (the price of protection against default) mostly narrowed in Europe and the US, as equities provided strong positive returns. US 2-year bond yields traded up from 0.69% to 0.75%. US 10-year yields traded from 1.74% to 1.84%. Upward momentum was also likely assisted by the release of better-than-expected US industrial production data (though weather-related).

Shortly, the US Fed Minutes from its January meeting will be released, although they are unlikely to be a major market mover. These are likely seen as somewhat obsolete, given subsequent significant market developments. Fed fund futures currently price around 32 bps of Fed hikes over the next two years.