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.
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