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NZGBS: AU-NZ 10-Year Too Low Based On OIS Outlook Alone

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Last week, the AU-NZ 10-year yield differential narrowed to around -100bp, its lowest level since the late 1990s on the back of a worse-than-expected deterioration in NZ’s current account deficit (-8.9% of GDP Vs. -8.5% expected) and the resultant comments from S&P about bond ratings.

  • A simple regression of the AU/NZ 10-year yield differential versus the AU-NZ 12-month forward OIS differential (over the current tightening cycle) revealed that current account deficit concerns in NZ versus multi-decade high surpluses in Australia had been worth around 20-25bp on the 10-year differential.
  • Ahead of tomorrow’s NZ Trade Balance for February, the same regression analysis suggested the AU-NZ 10-year yield differential was around 15-20bp too low based on the 12-month forward OIS differential (Figure 1).

Figure 1: AU/NZ 10-Year Yield Differential Vs. AU/NZ 12M Fwd. OIS Differential

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Last week, the AU-NZ 10-year yield differential narrowed to around -100bp, its lowest level since the late 1990s on the back of a worse-than-expected deterioration in NZ’s current account deficit (-8.9% of GDP Vs. -8.5% expected) and the resultant comments from S&P about bond ratings.

  • A simple regression of the AU/NZ 10-year yield differential versus the AU-NZ 12-month forward OIS differential (over the current tightening cycle) revealed that current account deficit concerns in NZ versus multi-decade high surpluses in Australia had been worth around 20-25bp on the 10-year differential.
  • Ahead of tomorrow’s NZ Trade Balance for February, the same regression analysis suggested the AU-NZ 10-year yield differential was around 15-20bp too low based on the 12-month forward OIS differential (Figure 1).

Figure 1: AU/NZ 10-Year Yield Differential Vs. AU/NZ 12M Fwd. OIS Differential

Keep reading...Show less