NZ: 10yr GB yield well below fair value - Westpac

Imre Speizer, Research Analyst at Westpac, suggests that their long-term fundamentals-based model of 10yr government bond yields indicates most countries’ yields, including NZ’s, are well below fair value.

Key Quotes

“Global government bond yields have been in a trend decline for around three decades, co-moving across countries, with many countries now at or near record lows. This co-movement suggests common global influences on government bond yields, a feature of our fundamentals-based model called the GIRM (Global Interest Rate Model).

According to the GIRM, NZGB yields have consistently been below fundamental fair value since 2012, the 10yr being109bp below fair value of 3.76% as at June 2016. Moreover, fair value remains in a declining trend. One interpretation of this result is that global investment flows into NZGBs accelerated from 2012 due to (a) diversification of investment funds and (b) global demand for high-yielding high-quality assets.

ACGB fair value

The picture for Australian yields is not too dissimilar to NZ’s, unsurprising given the close economic relationship between the two countries. Australian yields have persistently been below fair value since 2012. As at June 2016, the 10yr ACGB was 161bp below fair value of 3.93%. Moreover, fair value remains in a declining trend.”