AU-NZ 10Y Differential Back In The Bottom Half Of The Range

Today, the 10-year NZGB benchmark has experienced a 4bp increase in yield, aligning with the sell-off in ACGBs. Consequently, the AU-NZ 10-year yield differential remains unchanged at -85bp.

• However, a broader historical perspective unveils a noteworthy underperformance by NZGBs since mid-June. This has positioned the AU-NZ 10-year yield differential within the lower half of the -40bp to -100bp range it has traded in this year.
• In mid-March, the AU-NZ 10-year yield differential reached a concerning -100bp, marking its lowest level since the late 1990s. This sharp decline was triggered by a disappointing deterioration in NZ's current account deficit, which caught the attention of S&P bond ratings, leading to consequential comments from them.
• After this occurrence, the shifts in the AU-NZ 10-year differential can largely be attributed to market perceptions of the expected policy rate trajectories of the RBA and the RBNZ.
• For instance, between March to June, the market reflected expectations of the RBA catching up to the rate hikes that the RBNZ had already executed. This was evidenced by the AU-NZ 1Y3M swap differential moving from -175bp to -75bp over this interval.
• With both the RBA and the RBNZ currently holding their policies steady, the 1Y3M swap differential has subsequently eased back to -128bp versus the official rate differential of -140bp.

Figure 1: AU/NZ 10-Year Yield Differential Vs. 1Y3M Swap Differential

Source: MNI – Market News / Bloomberg