Investors pile in to NZ Govt bonds that are in short supply, driving yields to test the 3% level for the 10yr. Local swap rates show flatter bias

By Jason Wong

Bond market movements are also modest.  After closing a smidgeon below 2.30% yesterday on unrounded figures for the first time since late-November, the US 10-year Treasury yield has spent much of the trading session in a tight 3 bp range and currently sits at 2.29%.

From a technical perspective, the market is vulnerable towards gapping a lot lower towards 2% now on any further risk-off sentiment.  We’ll see.

In France, the latest polls show little change, after fair-left candidate Melenchon’s recent storming run and this has helped the France-Germany spread narrow by a few basis points.  Support for the top four candidates is separated by only six percentage points.  A bad scenario would be far-left (Melenchon) and far-right (Le Pen) candidates winning the first round of voting, making the second round vote a choice between two highly unappealing candidates for centrist voters.  EUR implied volatility continues to nudge higher ahead of the vote, now only ten days away.

In local trading yesterday, the swap curve showed a modest flattening bias, with traders not keen to take the 2-swap rate lower after its recent downward run, closing 1 bp higher at 2.27%.  Meanwhile global forces kept downward pressure on the longer end of the curve, with the 10-year rate down 1.5 bps to 3.30%, its lowest close this year.

However, there was more price action in the government bond market, with the 10-year rate moving sub-3% at one stage and ending the day down 5.5 bps to 3.005%.  This reflected the NZ bond market playing catch-up with the downward draft in yields facing the Australian market.  A scarcity of supply of NZ bonds and upcoming large coupon payments supported the move lower.

Between now and the next trading day on Tuesday there is an abundance of economic data releases.  In the local trading session today, NZ will see REINZ housing market data, the manufacturing PMI and food prices, while the Australian employment report and RBA financial stability review will be of some interest.  Towards the end of the day, China releases trade data.

Over the holiday period the key releases are US CPI and retail sales data along with more Chinese data including Q1 GDP.

Daily swap rates

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for(i=0;i

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Jason Wong is on the BNZ Research team. All its research is available here.