The global benchmark bond yield is the US Treasury 10 year bond. This yield is by which most others are judged.
In a normal sloping yield curve environment, longer dated US Treasury bonds would have higher yields, shorter dated ones would have lower yields.
Typically, sovereign bonds of other nations would have different yield profiles to their US equivalents, reflecting relative sovereign risks.
And New Zealand Government bond yields would have a yield premium to most other large economies.
Well, as we all know, the years since the pandemic have been far from normal. However, 2024 was a year many of the pandemic distortions returned roughly to normal, at least for monetary policy, and the quashing of inflation.
But the end of 2024, was far from normal. We start 2025 with some obvious distortions.
It is above our paygrade to explain why these distortions still exist, but we can quantify them. Maybe you know why. But in quantifying them, readers can get a sense of a) the forces that are yet to unwind, and/or b) the imbalances that are driving these distortions.
In the end, these benchmark distortions are there and the 2025 track will influence our retail borrowing and investing yields, so starting the year with a base understanding of what they are can only help.
This is how these core benchmarks moved in 2024.
| 2024 BENCHARK YIELD SHIFTS | ||||
| 1-Jan-24 | 1-Jul-24 | 1-Jan-25 | ||
| 10 yr | ||||
| US | 4.05 | 4.47 | 4.56 | |
| China | 2.57 | 2.24 | 1.63 | |
| Australia | 4.12 | 4.38 | 4.46 | |
| NZ | 4.63 | 4.68 | 4.59 | |
| 2 yr | ||||
| US | 4.39 | 4.76 | 4.24 | |
| China | 2.24 | 1.66 | 1.08 | |
| Australia | 3.86 | 4.20 | 3.88 | |
| NZ | 4.42 | 4.87 | 3.61 | |
And this is how the key relationships moved.
| 2-10 curve (bps) | ||||
| US | -34 | -29 | 32 | |
| China | 33 | 58 | 55 | |
| Australia | 26 | 18 | 58 | |
| NZ | 21 | -19 | 98 | |
| NZ 10y premium (bps) | ||||
| US | 58 | 21 | 3 | |
| China | 206 | 244 | 296 | |
| Australia | 51 | 30 | 13 | |
| NZ 2y premium (bps) | ||||
| US | 3 | 11 | -63 | |
| China | 218 | 321 | 253 | |
| Australia | 56 | 67 | -27 | |
Some obvious distortions stand out.
1. Ten year yields rose everywhere, except in China - and New Zealand (which is perhaps something of a surprise)
2. Two year yields held mostly, again except in New Zealand and China
3. The US yield curve returned to a 'normal' slope, just like the other reference countries listed above.
4. But the New Zealand premium to the UST benchmarks disappeared at the 10 year level, and became sharply inverted at the two year level.
5. The New Zealand interest rate premiums to the Australian Government bond benchmarks shrank at the ten year level and also turned negative at the two year level.
6. China did its own thing, with financial markets sharply moving to risk-off settings. (The relationship to New Zealand rates is probably not very relevant or consequential, even if it is 'interesting'.)
Readers need to think about how these distortions will move in 2025. And that will be because of shifts in market risk perceptions in each country in the pair.
History shows distortions can last quite a while, but they eventually 'normalise'. Some of the interest rate unnaturalness can get adjusted or 'reconciled' by offsetting changes in the currency exchange rates. So if policymakers press interest rates in one direction, the consequence in exchange rates could be sharp and countervail the interest rate distortion.
25 Comments
What indeed..
RBNZ options. A) Keep rates were they are/or raise to protect NZ (the many) from the ravages of inflation. Or. B) Drop rates to protect the speculative and bank profit (the few) and decimate the many thru more rabid inflation.
RBNZs mandate is inflation management, not protecting asset speculation. Would you mind explaining why to think he would do the opposite...?
Yes the pre-tsunami like, unbelievably low tide of interest rates of 2021 are now 3 years into causing the multiyear, house price Crash damage now seen and akin to the Big Tsunami wave-in "washout".
So with USA mortgages now near 7%.......our NZ rates are now temporarily too cheap. Expect increases in 2025 at the longer end, then cascading back down to the shorter terms.
Rates in the USA are now moving up and we can, but only, follow them
Soz Ponzi Donkey-Deepers, no low rates white horse, will be riding in to bail out the Overindebted.
Agreed. Just needs the banks to stop "extending and pretending" on non performing loans. Perhaps DuVal will give them a nudge.
DuVal's previous bankruptcy lesson is quoted as "spread debt out far and wide so it was impossible for lenders to see the full exposure". Have heard this often quoted by debt speculators as well.
I think the real lesson will be "the mess is worse than you think".
Banks, nor anyone else, will be able to "pretend" when asset values come under pressure. And just quietly, some 'assets' are at values that are truly ludicrous. "Extending" is an option for some assets, but only when a floor can be found that justifies risk.
Hope I'm wrong. But these collapses can come thick and fast - especially when markets & market commentators see little or no risk while believing, and echoing, the groupthink that everything can only go up. What is it that Buffet says? "Be fearful when others are greedy"? And what's Buffet doing at this time?
"Long-term interest rates are a key channel through which financial market shocks transmit to New Zealand, and risk premiums in long-term interest rates are highly correlated globally. The term structure model I estimate in this note suggests that the term premium in New Zealand 10-year bond rates has trended down since the 1990s, and is close to zero currently. The term premium is influenced by global financial market volatility and domestic macroeconomic stability. In New Zealand, inflation volatility, the business cycle, and global financial market volatility can largely explain movements in the term premium. Stable inflation, a strong domestic economy, and low global bond market volatility has contributed to a low term premium in recent years. Movements in the term premium have important macroeconomic implications. An increase in the term premium is associated with a fall in domestic inflation and activity over the following year. Monetary policy may sometimes need to offset term premium shocks to achieve domestic macroeconomic objectives."
https://www.rbnz.govt.nz/-/media/f9634c319a5b4311bdf10fcfeb66a80f.ashx?…
"Stable inflation, a strong domestic economy, and low global bond market volatility has contributed to a low term premium in recent years. "
I think you'll find that many economists (and not before friggin' time!) are revising what 'a strong domestic economy' looks like.
"Rock star economies" - like the one John Key built - are exactly like rock stars. I.e. they over indulge on high living and drugs, and the 'day of reckoning' comes where they hit rock bottom.
Or put another way ... Once banks have securitized (mortgaged) everything they can in NZ, while we've been spending up big buying stuff from overseas that we are paying for on credit ... Where to then?
Discl: I don't care. Sorry. I'm 'wealthy and sorted' and most of what I own is overseas. Keep voting for tax cuts. /sarc.
Thank you for this very topical article David.
I would suggest that the drop in yields in China and NZ is simply a reflection of the market recognising that these two countries' economies are in poor shape. Inversely, the US yields have risen in recognition of their well performing economy (for 2024 anyway).
I also think that more focus should be spent on differentiating the forces affecting longer term rates (international yields), vs shorter term rates (central banks). To me it's quite clear that in NZ, shorter term interest rates will continue to reduce and longer rater will continue to rise in 2025. (also the NZD will continue to drop, something that has also been quite clear for several months).
Easier said than done when we are subject to the 'value' of a currency we do not issue due to the fact we import so much (effectively in that currency) that we require to 'grow' our economy...but the US is as captured by that fact as everyone else, only from the opposite direction.
Nobody likes to lose....especially the rich and powerful.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.