Strong demand for latest NZGB auction drove yields lower. US benchmark yields fall too. Global risk aversion dampens local rates

By Kymberly Martin

NZ bond yields declined by more than swaps yesterday.

Overnight US 10-year yields traded between 1.49% and 1.53%.

After yesterday morning’s very brief spike higher following the US FOMC announcement, US yields drifted lower into the close of their trading session. This set the tone for the open of the NZ market yesterday morning. NZ yields all opened lower. Over the course of the day, NZ swaps climbed off their lows but still closed down 2-3 bps on the day, across the curve. NZ 2-year swap closed at 2.06%, as the market now prices around a 1.66% trough in the OCR within the year ahead.

NZGB yields initially traded a similar pattern to swaps, but traded lower into the close, following the NZDMO’s auction of NZD150m of NZGB 2033s. This attracted good demand, with a solid bid-to-cover ratio of 2.3x. Longer-dated NZGBs closed down 4 bps on the day, while shorter dates declined 5-6 bps.

In a relatively quiet night, with only a smattering of data releases, US 10-year yields traded up from 1.50% to early morning highs above 1.53%. They now sit around 1.49%. Since the late-June ‘Brexit’ vote, US 10-year yields have traded a range between 1.32% and 1.62%.

Through to year-end we see yields broadly in a 1.25-1.75% range. The upper-end of the range is likely to be reached if the market prices our core view of a further Fed rate hike in December. The lower-end could be visited during periods of heightened global risk aversion. In turn, these levels will impact on the long-end of the NZ curve.

Today’s domestic focus will be the release of the ANZ business survey for July. There is some potential for this to be dampened by the initial uncertainty following the ‘Brexit’ vote and soaring NZD at the time of the survey. However, NZ growth indicators are starting from a high level. It is low-side inflation indicators rather than growth risks that have been weighing on NZ short-end yields.

Daily swap rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.