Long term international government bond benchmark interest rates have an outsized impact on New Zealand.
Sure, the OCR rules for very short term rates. But it is the longer maturities that set the yield benchmarks. These longer rates are how commercial property is valued, how corporate equities are assessed, and how currency relativities are set.
This is where we are at present:
| Govt bond yields | 2 yrs | 5 yrs | 10 yrs |
| % | % | % | |
| US | 4.38 | 4.58 | 4.76 |
| Japan | 0.65 | 0.82 | 1.20 |
| China | 1.18 | 1.42 | 1.62 |
| Australia | 3.90 | 4.05 | 4.53 |
| New Zealand | 3.59 | 3.99 | 4.65 |
Things have changed rather quickly over the past three or so months.
This is where we were on October 1, 2024
| Govt bond yields | 2 yrs | 5 yrs | 10 yrs |
| % | % | % | |
| US | 3.61 | 3.51 | 3.73 |
| Japan | 0.39 | 0.50 | 0.86 |
| China | 1.43 | 1.86 | 2.16 |
| Australia | 3.62 | 3.65 | 3.99 |
| New Zealand | 3.83 | 3.79 | 4.29 |
And this is where we were at the start of 2024.
| Govt bond yields | 2 yrs | 5 yrs | 10 yrs |
| % | % | % | |
| US | 4.72 | 4.29 | 4.55 |
| Japan | 0.01 | 0.18 | 0.59 |
| China | 2.24 | 2.41 | 2.52 |
| Australia | 3.82 | 3.73 | 4.08 |
| New Zealand | 4.54 | 4.32 | 4.64 |
A number of things stand out here. Worth noting are ...
- the unwinding of the US inversions
- the speed of change up in the past 90 days of US rates, post-election
- NZ rates have moved from a premium to the US, to a discount to the US
- how far and fast the Chinese rates have fallen recently
- how far and how fast the Japanese rates have risen recently
- Australian rate have risen, but only modestly.
With rates moving this fast, it is bound to affect us. Even without the geopolitical pressures, these shifts are important from a Kiwi point of view because ...
- Australia owns 90% of our banking system, and the way they look at returns (through their yield perspective) impacts us. (If yields rise there more than here, it might push down the value of bank shares. And to mitigate that, bank boards will start looking for even bigger profits.)
- Japan and China are two of the world's major creditor nations. While we don't source much capital from them, Australia and the US does, and their situations are moving in opposite directions, and this too will affect the availability and pricing of the offshore borrowing we do.
- the US financial markets are where most of our foreign funds are directly sourced, or at least priced.
Interestingly, New Zealand benchmark bond yields are no longer at a premium to equivalent Australia rates across the shorter end of the tenors. And our relationship to the US has taken a major change. We are pivoting and even though our 10 year is back to where it was a year ago, it is now in a new rising trend.
Things are still on the move. It seems unlikely this is where these yields will be mid-2025 or the end of 2025.
The purpose of this review is to establish the benchmarks of where we start in 2025, and show how we got there from 2024.
Got a perspective on these shifts? Share it in the comment section below.
And for completeness, here are the current financial market pricing expectations for the OCR in 2025.
13 Comments
Why? Reckon that's on track with the ratio of macroeconomists vs real estate agents in the country
Or, more generally speaking, with how much exposure average Joe has to the real estate movements vs macroeconomic policies
Also, it's a matter of complexity. Jane sold a house down the road for a 400k premium is much easier to comprehend than why the Japanese bonds have risen in the past 12 months
For the last 40 years, all you needed to know was that interest rates were dropping, and money kept getting cheaper. Inflation wasn’t even part of the conversation, no need for the average person to care about macro. But if rates keep trending up from August 2020 and the long end of the yield curve keeps rejecting cash rate cuts like it has since September 2024, we might be entering a new cycle, breaking away from the secular bond bull market. I feel bad for the FHBs who jumped in at the peak, but no sympathy for the spruikers caught in last year’s bull trap.
I think you and I are signing from a very similar sheet of music here. My warning back in late 2021-2022 to people was that it appeared that the US 10 year was breaking out of a 40 year trend of falling interest rates - and this could has a profound impact on everything they thought they knew about investing (primarily in bonds and property - nobody really talks about stock pricing on here anyway). Getting rich off property the last 40 years has been easy as interest rates went from all time highs to all time lows. No real need to worry about timing..just buy and get 7-10% annual returns. I personally don’t think current prices in property can hold if interest remain steady/flat, let alone rise again from here. Current prices are based upon interest rates being cheaper in the future than they are now. But in my interpretation of the 10 year yield is saying mortgage rates could well be higher in the future than they are now - so be extremely careful about taking on too much debt as the cost of that debt could keep rising, not falling (ie the opposite of what everybody’s experience paying off a mortgage the last 40 years).
Yes, I agree with everything you said. Bond market yields are currently reaching levels last seen between 2008 and 2011. A 5% 10y yield is approaching crisis territory for the US, UK, Australia and New Zealand, while for Japan, it's likely around 2% (which is approaching quickly). Jamie Dimon and Stanley Druckenmiller have both talked about the potential of the US 10y yield hitting 7%. That wouldn’t crush most Americans fixed for 30-years, but it would crush us here in NZ.
Yeah the chart looks there could be a lot of upside to come in the 10 year yield ie breaking out a lot higher - but who knows what may happen in terms of geopolitical events and central bank intervention/manipulation of markets the next 12 months. Either way it looks like we’re are again in a rock/hard place position and once again trying to avoid taking our medicine for living beyond our means. Ie too much private debt relative to our GDP/incomes.
All rates are surely rising and rising hardcore!
My Bloomberg subscription, while expensive for the small fish I am, has great economic news/info!
https://www.bloomberg.com/markets/rates-bonds
The NZD has keeps tumbling with every cut of the OCR while the US 10 year treasury goes up, this will create huge pressure on inflation and at some point the OCR will start climbing again to protect the NZD which has lost 15% in recent months. In my opinion the property market will see next phase of crash pick up speed in coming year
Yeah if the US 10 year goes through 5% and I was loaded to the eyeballs with mortgage debt here in Nz, I would be feeling extremely worried.
To me, if the US 10 year goes above 5% then people should go back and look at interest rates in the post depression/WW2 period ie the period following the last time we had a period of such low interest rates to see what might be possible.
It looks to me that the Fed could go back to rate hikes again at some point this year - not a forecast just a possibility that has generally been completely dismissed - just as my views were that the OCR could go up to 5 or more following COVID (was told this would be impossible as the economy and housing market would never survive ..but it happened and we survived).
Within the treasury of all the NZ Based divisions of the Aussie banks (or in there parent) there are separate legal entities based in the UK and US used to issue bonds in that environment and manage the swap from these currencies back to NZD. They legally outsource funding this way., though they normally share their offices offshore, often sitting on the offshore trading floors of the banks.
The sole purpose is to access fixed term funding and roll over existing funding for NZ entity.
What happens offshore 100% impacts us and our rates.
The 2 year used to be the most popular rate, but I think if you now look duration will be shorter.
If the UK/US raise there overnight rate, it will impact NZ more then it has in the past due to this shorter duration
If everyone in NZ moved to 6 month fixed rates, we would be locked to the US/UK/Europe 6 month funding costs.... sure there is NZ term deposit funds but not enough to fund 360 billion.
Rock and hard place time, what you would probably see is offshore rise and no RBNZ rise and a falling NZD.
is this a case of survive until trump goes away? He wants Greenland for natural resources but also to enable and protect the northern shipping channel around the artic, global warming will make this passable before 2030 year round, and its safer then middle east shipping routes.... USA could move to Greenland based oil and gas, avoid middle east and having to buy via Saudi, at this point it could pull out of the middle east, saving billions such a different world then the last 50 years, this is a new world well removed from the bitter lake agreements where US would provide security to Saudis and in return Saudis would price oil in USD only.... Saudis IMHO have more to lose here.
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