Benchmark US Treasury bond yields may be falling on risk aversion, but that hides a shift in sentiment away from risk-free American options as their fiscal mismanagement gets entrenched

It is rare enough that we should note it.

On Friday, for the first time since a very brief dip at the start of 2025, the market yield for ten year NZ Government bonds is lower than for the equivalent US Treasury 10 year bond.

Prior to that, this happened from March 2018 to May 2020 in the meat of the first Trump presidency when financial markets were roiled by haphard fiscal management. From May 2020 to May 2021 things got volatile as well before 'normal service' was restored in a rising market and the NZGBs delivered yield premiums to the US benchmark.

The long run situation had always been NZGB's incurring premiums over the the US benchmark. This 'normal' makes perfect sense - the Kiwi economy is tiny and a consequential commodity economy. The US economy is the largest on earth, driven by core consumer demand, demand that shapes the global economy.

But now, investors may be having second thoughts. At least at the margins; many investors looking for stability are losing faith in a Trump-managed US and looking for alternatives. Obviously New Zealand doesn't have anywhere near the capacity to supply that alternative, but it is part of a diversification picture for those that seek insurance from the US mismanagement.

It says a lot that our stuttering and stunted economy, where the central government deficits are rising, can play a role like this. It is more about avoiding the US than a tick for New Zealand.

But we have a higher sovereign credit rating that the US (AA+ or Aaa, depending on the rater, for New Zealand, AA+ with wavering prospects for the US). According to the ratings agencies the next move for New Zealand could be up but the next move for the US is almost certainly down. So that explains why investors are shifting their requirements for a bigger risk premium for US debt than New Zealand debt.

All this comes even though many giant financial institutions are required (in many cases by law) to hold US Government debt. Such requirements in New Zealand are tiny and local.

It might not be a surprise that this week's shift in the 'premium' turns on its head and we are a preferred risk free benchmark. We won't be the only one, but it is a measure of the fall from grace of the vaunted US Treasury debt in investor eyes that this is happening at all.