By Jonathan Underhill
New Zealand government bond yields have fallen below the levels plumbed in the depths of the global financial crisis as overseas investors flee from the European sovereign bond market.
The yield on the benchmark 10-year bond sank to a record 3.87 percent yesterday, pushing below its low of early 2009, when it last approached 4 percent.
Even at historic low levels, New Zealand yields look relatively attractive compared to 10-year Treasuries at about 2 percent and German bunds at 1.81 percent. Italy’s 10-year note was last at 7 percent and Spain’s was at 6.41 percent, underlining the risk investors see in holding those securities as Europe grapples to contain its debt crisis.
“You know things in Europe have got bad when New Zealand gets talked about as a safe haven for global bond investors,” said Christian Hawkesby, head of fixed income at Harbour Asset Management in Wellington. “There has been strong demand from foreign investors looking for an alternative to the European government bond market, which is looking an increasingly vulnerable place to be.”
Rising borrowing costs in the euro zone has prompted the European Central Bank to buy Italian and Spanish bonds, though the move has prompted a clash of wills between France, which supports more buying by the ECB, and Germany, which wants to limit the central bank’s role. The Bank of England called the debt crisis the “single-biggest risk” to the UK economy.
For New Zealand, rallying government bonds mean the Treasury’s Debt Management Office has never been able to borrow fixed for 10 years more cheaply.
The DMO’s latest bond auction is today, for $500 million, made up of $200 million of 6 percent December 2017 bonds, $200 million of 5 percent March 2019 bonds and $100 million of 5.5 percent April 2023 bonds.
Helping drive down yields this week has been the maturity of Nov. 15 bonds, of which there was about $8.77 billion outstanding. That’s created a natural demand for longer-dated debt as fund managers look to re-invest.
Investors have also been more willing to hold bonds amid speculation the Reserve Bank won’t rush to raise the official cash rate from a record low 2.5 percent, given inflation pressures aren’t accelerating markedly and the domestic economy is struggling to pick up pace.
Traders are now pricing in a small cut to the OCR over the next 12 months, based on the Overnight Index Swap curve, with the December contract at 2.44 percent and March at 2.31 percent.
See our interactive bond rate charts here.