Yesterday, benchmark bond yields took a steep dive.
Ten year US Treasury bond yields fell on Friday (our time) to just 1.78% although they recovered somewhat today to 1.81%.
These are low rates, levels last seen in April 2013.
However, the real impact and some drama is actually being played out in New Zealand swap markets.
Because it is the long dated bond yields that are falling in New York, that is pressuring our New Zealand wholesale rates down, especially for those of four years duration and longer.
The drama is that the yield curve will start on Monday virtually flat.
The oft-quoted 2-10 curve is at a miniscule 7 bps. (That is, there is only a seven basis point rate premium for 10 year interest rate swaps over a two year.)
The mortgage-important 1-5 year curve is just 9 bps.
Both represent steep shifts from this time last week when each was over 20 bps.
This table gives a good idea of how the rate curves have flattened.
| 2 yr swap | 5 yr swap | 10 yr swap | 1-5 curve | 2-10 curve | |
| daily start rate | rate % | rate % | rate % | bps differential | bps differential |
| 19 January 2015 | 3.73 | 3.78 | 3.80 | +9 | +7 |
| 12 January 2015 | 3.83 | 3.94 | 4.03 | +21 | +20 |
| 1 January 2014 | 3.88 | 4.76 | 5.30 | +133 | +142 |
| 1 January 2013 | 2.71 | 3.14 | 3.81 | +51 | +110 |
| 1 January 2012 | 2.79 | 3.37 | 4.12 | +67 | +133 |
| 1 January 2011 | 3.80 | 4.73 | 5.53 | +134 | +173 |
| 1 January 2010 | 4.57 | 5.53 | 6.09 | +187 | +152 |
| 1 January 2009 | 4.35 | 4.73 | 5.04 | +46 | +68 |
| 1 January 2008 | 8.50 | 8.06 | 7.56 | -69 | -94 |
Readers with a long memory will recall that our rate curves inverted in 2005 and stayed inverted until mid-2008.
Inverted yield curves are actually not common, despite their presence in New Zealand in recent history. They indicate that investors demand higher short term rates than long term ones, seeing more risk in the short term than the long. That is often suggesting the market believes it is facing an impending recession - but it is not a foolproof signal.
We are a whisker away from an inverted rate curve in New Zealand as we start out 2015.
Even if we don't actually 'go negative' the situation will have an important influence of mortgage market wholesale costs.
And it will cause considerable head-scratching at the RBNZ. The next RBNZ OCR review is on Thursday, January 29, 2015 and markets are expecting no change to the 3.5% policy rate.
However, with the two year wholesale swap rate currently at 3.73% and the five year at just 3.78%, they place the OCR setting in an odd point. It looks even odder when the 10 year wholesale swap rate is just 3.80%.
The accompanying Statement with the next OCR review will be scrutinised closely for signals.
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