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AUSSIE BONDS: AU-NZ 10Y Yield Differential Too High

AUSSIE BONDS
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The AU-NZ 10-year yield differential is unchanged today, standing at -2bps compared to the recent high of +10bps early November, which marked the highest level since August 2022.

  • The recent decline in the 10-year yield differential between Australia and New Zealand has mirrored a similar move in the AU-NZ 1-year forward 3-month swap rate (1Y3M) spread.
  • However, a simple regression analysis of the AU-NZ 10-year yield differential against the AU-NZ 1Y3M spread over the past 12 months shows that the 10-year differential is around 8bps above fair value based on the regression model (-2bps compared to a fair value of -10bps).
  • The 1Y3M differential is a proxy for the expected relative policy path over the next 12 months.

 

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The AU-NZ 10-year yield differential is unchanged today, standing at -2bps compared to the recent high of +10bps early November, which marked the highest level since August 2022.

  • The recent decline in the 10-year yield differential between Australia and New Zealand has mirrored a similar move in the AU-NZ 1-year forward 3-month swap rate (1Y3M) spread.
  • However, a simple regression analysis of the AU-NZ 10-year yield differential against the AU-NZ 1Y3M spread over the past 12 months shows that the 10-year differential is around 8bps above fair value based on the regression model (-2bps compared to a fair value of -10bps).
  • The 1Y3M differential is a proxy for the expected relative policy path over the next 12 months.

 

Keep reading...Show less