On Friday, NZ swaps closed 1-2 bps higher.
On Friday night US 10-year yields traded between 2.16% and 2.22%, closing for the week at 2.20%.
The biggest news on Friday was action taken by rating agency S&P against NZ banks. It downgraded the credit rating on seven NZ financial institutions.
Of the eleven institutions it left with unchanged overall ratings, six had their ‘stand-alone’ rating lowered. In some cases, such as NZ’s four major banks, the overall rating takes into account factors such as support from AU parent banks.
S&P believes NZ financial institutions face increased risk due to sharp rises in house prices in Auckland. This is particularly the case due to “structural external weaknesses” in the NZ economy. However, while the rise in house prices raises the risk of a harsh correction the scenario still remains “unlikely “in the S&P’s base case.
The ratings move could see bank credit spreads marked a little wider within what has been a tight range for NZ banks and most NZ credit this year. Limited domestic issuance against persistent inflows, through the likes of Kiwisaver, remains a basic support for NZ credit, in the absence of a major global credit event.
On Friday, data also showed non-resident holdings of NZGBs remained at 69.7%. Offshore demand is seemingly undeterred by the downtrend in the NZD.
On Friday night, US yields made intra-night highs between the release of solid US industrial production data and a slightly below-expectations University of Michigan consumer sentiment release. From intra-night highs close to 2.22%, US 10-year yields ended the week at 2.20%.
It is a relatively low-key week for NZ data. Today’s PSI reading is unlikely to be a market mover unless it offers up a very sharp fall. Recall, last month it was at a hearty 58.2, representing strength in areas such as tourism that are helping to offset weakness elsewhere in the economy.