The reason for the very high historical correlation is that foreign investors have held over 60 percent of NZ Government bonds on the issue and they tend to buy and sell NZ bonds in tandem with their US bond buying and selling.
In the past, the risk premium applicable to NZ bonds over the US ranged between 1.00 percent and 2.00 percent. Although it did blow out to a 2.5 percent gap in 2009 when foreign investors all departed the shaky isles at the height of the GFC and the Kiwi dollar plunged to 0.5000.
Hence, our interest rates track the US rates very closely. Offshore fund managers have traditionally invested in NZ bonds as a straight yield enhancement on US Treasury Bonds.
At present, the bond premium or spread is only 0.15 percent (NZ 2.98 percent against US 2.84 percent) as NZ bond yields have not increased over recent weeks with the sharp increase in US 10-year Treasury bond yields. There are two things behind the compression of the NZ/US bond spread to only 0.15 percent, well below historical levels.
Moreover, our Balance of Payments “Net International Income Position” has certainly increased (as a percentage of GDP) and this reduces the risk premium we have to offer foreign investors. The foreign investors will not see the merits for staying in the NZ bond market and will sell out at some point.
Roger J Kerr contracts to PwC in the treasury advisory area. He specializes in fixed interest rate securities and is a commentator on economics and markets, Interest.com.nz revealed. Furthermore, we are willing to accept help to improve the coverage of this issue. Examples or any related experiences would be a huge help. Any insight or views on what might happen next or what should happen next? Any links to other news, data or research to shed more light on this? Corrections regarding our report are also welcome.