Flattening Pressure Looms Over New Zealand’s Bond Yield Curve

Despite the central banks of New Zealand and Australia approaching bond purchases in very different ways, the two countries have almost identical yield curves, which have both steepened this year.

This may be about to change.

The weight of purchases from the Reserve Bank of New Zealand across a broad range of maturities is piling up. Scope for curve flattening should build once the market digests what is likely to be a record-setting sale of new 20-year bonds this week.

The picture is different in Australia, where policy makers are focused on pinning down three-year yields. The sale there of a planned new 30-year bond at the end of the month will add to the prospect of further steepening.

Flattening Pressure Looms Over New Zealand’s Bond Yield Curve

What is more, the Reserve Bank of Australia hasn’t bought any bonds under its yield-curve control program since May 6, while the RBNZ has been soaking up close to NZ$1 billion ($660 million) per week.

This puts New Zealand’s policy makers on course to hit the NZ$60 billion upper limit of their quantitative easing program by May next year, suggesting a need to raise the cap.

The mere prospect of the RBNZ boosting its buying may also add to latent flattening pressure on the yield curve, if research from the European Central Bank is any guide.

The ECB found that “stock effects” -- the anticipation and announcement of parameters in bond purchase plans -- applies greater downward pressure on yields than the “flow effects” of the actual buying itself.

In the meantime, New Zealand’s sale of new May 2041 bonds is scheduled via syndication for sometime this week.

It will be the government’s longest maturity debt and the sale could also see the largest demand yet after syndicated offerings in April and June set records.

Below are other key economic data and events due this week in the Asia-Pacific region:

  • Monday, July 13: India CPI
  • Tuesday, July 14: Singapore GDP, Australia business conditions, wages, Japan industrial production, China trade balance
  • Wednesday, July 15: Australia consumer confidence, Bank of Japan policy decision
  • Thursday, July 16: New Zealand CPI, Australia unemployment, China industrial production, GDP, retail sales, fixed assets, Bank Indonesia policy decision, Bank of Korea policy decision
  • Friday, July 17: New Zealand manufacturing PMI, Singapore non-oil domestic exports

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