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NZGBS: Current Weighs On AU/NZ 10-year Differential

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Messaging from the RBA and the RBNZ since their respective policy meeting has been at different ends of the tightening spectrum, with RBA Governor Lowe signalling a willingness to consider a policy pause and RBNZ Governor Orr retaining his hawkish anti-inflation rhetoric.

  • It should therefore surprise few that AU-NZ short-end yield differentials have narrowed substantially over the past week or so. Take for example the 12-month forward OIS differential. That spread has pushed to around -150bp, its lowest level since early 2022. For reference, the differential was around -110bp at the start of the month.
  • The more noteworthy development today however has been the AU-NZ 10-year differential which narrowed 11bp to around -100bp, its lowest level since the late 1990s. The larger-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 were the catalysts. With Australia’s current account at multi-decade surplus highs as a share of GDP the difference couldn’t be starker.
  • While there are normally many factors at play a simple regression of the NZ/AU 10-year yield differential versus the AU-NZ 12-month forward OIS differential (over the current tightening cycle) gives a guide to the impact of needing to fund a current account deficit. At current levels, the AU/NZ 10-year differential is around 20-25bp too low.

Figure 1: AU/NZ 10-Year Yield Differential (% Y-Axis) Vs. Au/NZ 12M Fwd OIS Differential (% X-Axis)

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Messaging from the RBA and the RBNZ since their respective policy meeting has been at different ends of the tightening spectrum, with RBA Governor Lowe signalling a willingness to consider a policy pause and RBNZ Governor Orr retaining his hawkish anti-inflation rhetoric.

  • It should therefore surprise few that AU-NZ short-end yield differentials have narrowed substantially over the past week or so. Take for example the 12-month forward OIS differential. That spread has pushed to around -150bp, its lowest level since early 2022. For reference, the differential was around -110bp at the start of the month.
  • The more noteworthy development today however has been the AU-NZ 10-year differential which narrowed 11bp to around -100bp, its lowest level since the late 1990s. The larger-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 were the catalysts. With Australia’s current account at multi-decade surplus highs as a share of GDP the difference couldn’t be starker.
  • While there are normally many factors at play a simple regression of the NZ/AU 10-year yield differential versus the AU-NZ 12-month forward OIS differential (over the current tightening cycle) gives a guide to the impact of needing to fund a current account deficit. At current levels, the AU/NZ 10-year differential is around 20-25bp too low.

Figure 1: AU/NZ 10-Year Yield Differential (% Y-Axis) Vs. Au/NZ 12M Fwd OIS Differential (% X-Axis)

Keep reading...Show less