Short end yields restrained by weak Aussie employment. But uninspiring NZ yields look attractive compared to German, Swiss and Japanese equivalents

By Kymberly Martin

NZ curves steepened yesterday as long-end yields followed US moves higher.

Overnight, US 10-year yields have slipped back to 1.78%.

NZ swaps initially pushed higher across the curve, following the previous night’s substantial push higher in US yields. However, the move at the short-end soon ran out of steam.

Yields sank back again after the release of the weaker than expected AU employment report. AU 2-year swaps promptly dropped from 2.09% to around 2.04%. NZ equivalents dipped to 2.51% from morning highs around 2.55%, before closing at 2.52%.NZ-AU 2-year swap spreads widened to 48 bps from their recent lows round 43bps.

The NZGB curve also steepened as NZGB2027s closed up 5 bps. The yield on NZGB2020s closed up 1 bps, at 2.57%, following a solid NZDMO tender of NZD100m of the bonds. The yield is hardly compelling in the context of those historically on offer on NZ mid-curve bonds. However, they appear relatively attractive in an environment where German, Swiss and Japanese 5-year bonds offer -0.32%, -0.83% and -0.16% respectively.

Overnight, ECB Minutes showed that the Bank had debated whether the risks of global slowdown warranted pre-emptive monetary policy easing. The market continues to toy with the prospect of further easing as soon as the Bank’s next meeting on 10 March. German 10-year yields traded down from 0.26% to 0.21% as the Euro Stoxx 50 remained fairly flat.

US 10-year yields traded down from intra-night highs above 1.82%, to 1.78% currently. We now broadly see a 1.75%-2.50% range for yields this year. However, we acknowledge that a sharp ‘risk-off’ episode could prompt yields to temporarily visit the 1.50% level.