Very low returns across the standard term curve sees issuers 'feeding the ducks' at terms up to 50 years

By Jason Wong

US Treasury yields have remained in a tight range all week and overnight there was little price action again.

The 10-year rate is up 2 bps on the day at 1.75%.

The market continues to tread water ahead of tonight’s highlight of the week, retail sales data for April, which are expected to show a post-Easter rebound.

One theme doing the rounds this week has been strong demand for super-long bond maturities.  Investors are shunning bonds with negative yields and to get a decent yield one has to move further along the yield curve.  As they say, if the ducks are quacking then feed them.

Spain, a country on the verge of bankruptcy a few years ago, managed to sell 50-year bonds earlier this week (at a yield of less than 3.5%), meeting strong demand from investors.  Another of the “PIGS”, Italy is looking at doing a similar issue.

NZ’s government bond curve remains close to record low levels.  While NZ’s 10-year rate was up 1.5 bps to 2.615% yesterday, it has fallen nearly 100 bps since the start of the year with nearly a quarter of that fall over the first two weeks of May. Incredible.

Yesterday’s NZ’s swap curve flattened a little, with the 2-year rate up 4 bps to 2.21% and the 10-year rate up 2 bps to 2.84%.  Some traders were still taking off received positions in the swap market post the RBNZ’s Financial Stability Review.  Conviction in further OCR cuts was dampened a little with some in the market noting confusion about the RBNZ’s messaging.  June OIS is pricing in 13.5 bps of cuts at the next MPS, compared to 19 bps of cuts prior to the FSR.

NZ retail sales data this morning are expected to show a healthy 1.0% q/q lift in real sales in Q1.  From the market’s perspective next Tuesday’s inflation expectations are probably of greater interest.  Another meaningful fall in the 2-year figure would likely to trigger a reversal of that OIS pricing mentioned above.