Brian Gaynor over at businessday.co.nz has rightly pointed out that New Zealand government bond yields have risen in the last couple of days on market fears that the deposit guarantee will eventually cost the government significant amounts that will have to be raised with more government bond issues. The 10 year government bond yield has risen to 6.20% in the last two days from 5.75% earlier on Monday and 5.70% on Friday. Meanwhile, the Treasury's Debt Management Office (DMO) has announced it has cancelled a Treasury bond auction scheduled for Thursday because of difficult market conditions. "The government bond market has become quite volatile in recent days. We believe it is prudent to defer issuance until market conditions have settled," said NZ DMO Treasurer Philip Combes. This cancellation suggests professional investors fear the government has taken on an impossibly large contingent liability of NZ$150 billion that may eventually force it to print money to pay for. That would boost inflation in the long term and therefore forces bond prices down and bond yields up.
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