New Zealand Government Bond 10Y

Kiwibank said on October 5 that a stronger-than-expected US economy is creating upward pressure on New Zealand mortgage rates, as rising US government bond yields have pushed up swap rates in New Zealand's financial markets, a key reference rate for fixed mortgage rates. In its weekly economic analysis report, Kiwibank said the strength of the US economy may lead financial markets to absorb expectations of higher interest rates, amid forecasts that rates will stay elevated for longer. As a small economy, New Zealand's funding costs are influenced by overseas developments, and financial market interest rates tend to move in the same direction globally, especially long-term rates. Kiwibank also noted that US interest rates have surged to a 25-year high, and the spread between New Zealand's 2-year and 10-year government bond yields has widened from 100 basis points in May to 120 basis points. Meanwhile, the New Zealand dollar's decline below 56 US cents could benefit the New Zealand economy by supporting the export sector and making investment and purchases of goods and services in New Zealand cheaper for foreigners.

Some investors are increasing their allocations to New Zealand bonds, betting that a fragile recovery will make the Reserve Bank of New Zealand, or RBNZ, cautious about raising interest rates and help New Zealand bonds continue to outperform those of many developed nations. The New Zealand bond index has fallen just 0.3% from the start of the year through Friday, compared with declines of more than 1% for Canadian and US bond indices. UK government bonds are down nearly 3%, and Japanese bonds have fallen more than 4%. Markets expect the RBNZ to raise rates four more times by August next year, after two increases already this year, but RBNZ Assistant Governor Karen Silk said the next hike may not come until December. RBNZ board member Prasanna Gai takes the view that the policy rate may already be at a neutral level. Harvey Bradley, head of global rates at Insight Investment in London, said New Zealand bonds with roughly two to five years remaining are among the most attractive relative to bond markets globally. Tamsin Wilding, a portfolio manager at Harbour Asset Management in Wellington, warned that New Zealand bonds are starting to look expensive, with the 10-year New Zealand yield more than 30 basis points below its Australian counterpart. New Zealand inflation remains above the RBNZ's 1–3% target band and is not expected to return to the 2% midpoint until early 2028. Economic data due this week may show New Zealand's economy grew 2.2% in the second quarter from a year earlier before growth slows later in the year, according to a survey of economists.

Carl Hansen, a member of the Reserve Bank of New Zealand's monetary policy committee, said in an interview with Reuters that the rate hike on the 2nd was a clear consensus decision. He said policymakers agreed that financial conditions remain stimulative and that action was needed to demonstrate the central bank's commitment to returning inflation to target. The RBNZ raised its policy rate on the 2nd, signaled the possibility of further tightening, and warned that risks to the economic outlook had increased. Hansen said he would watch whether higher energy costs from Middle East-related supply shocks lead to persistently higher domestic inflation, and would also keep an eye on household spending, the housing market, and migration trends. He also noted that monetary policy as of May was "quite stimulative," but that the two subsequent rate hikes had brought it "into a more balanced state."

The Reserve Bank of New Zealand decided at its monetary policy meeting on the 2nd to raise the policy rate by 0.25% to 2.75%. Amid accelerating inflation, it stated that 'a gradual removal of monetary stimulus is appropriate,' signaling a tightening stance. This marks the second consecutive rate hike. New Zealand's inflation rate for the April-June quarter came in at 4.1%, exceeding market expectations, partly due to higher oil prices following the exchange of attacks between the US and Iran. The central bank expects inflation to remain elevated for the rest of the year and return to the midpoint target of 2% in the latter half of next year. It also indicated that 'further rate hikes may be necessary' regarding future interest rate movements.