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Summary
- Australian and NZ bonds rally, but bond yields go down.
- After holding up for several months, the NZ & the Australian dollars weaken.
- Low interest rates are being cited as the reason for these changes.
There is an inverse relationship between the bond yields and bond prices. There is also an inverse relationship between interest rates and bond prices.
As the central banks across the world kept the interest rates very low, the bonds prices saw a rally all over. Kiwi bonds were also no exception to this. New Zealand’s bonds have reached a year’s high as the interest rates remained low and unchanged during the monetary policy announcement by the RBNZ. This was also fueled by the decline in the US Treasury yields.
Correspondingly, the New Zealand bond yields dropped significantly. The 10-year bond yields were almost 17 basis points down. The trend, however, gained momentum throughout the week. Australia’s 10-year yields also declined as much as nine basis points to 1.65%.
Bonds in Australia and other emerging markets also surged. Accordingly, Australia’s 10-year yields declined as much as nine basis points to 1.65%.
It was US treasury that took a lead in moving upwards, with the country’s yields going down, except for last few weeks, when the yields were showing an upward movement.
Europe and the US kept their monetary policy stance unchanged, even New Zealand’s central bank, RBNZ, in its monetary policy statement, said that the interest rates would remain unchanged as the crisis was far from over.
The reasons for the rise in bond prices are not difficult to guess. The investors want to move to safe havens as the economy may not recover as expected previously. The other reason for this could be that investors are preferring bonds this time after sell-offs seen in the past as COVID-19 shutdowns again in several countries have only made other assets more risky.
Meanwhile, the Australian and the NZ dollars ended the week lower as the investors gave up on interest rate hikes.
The Australian dollar was down by almost 1.5%, at $0.7590, much below the support level of $0.7615.
The New Zealand dollar, however, has performed the worst in the last six months by dropping almost 2.5% at $0.6965.
The last few months were good for the Australian and the NZ dollar. The USD was on a losing streak against the two currencies. The first part of March witnessed the two currencies (Australian and NZ) going strong against the USD. The New Zealand dollar remained high at NZ$0.7199. In February, it achieved a high of NZ$0.7464.
In the same period, the Australian dollar was also range bound, down only three basis points at AUD 0.7752, pretty much in the range of AUD0.75 and 0.80.
The New Zealand dollar remained unchanged at NZ$0.7199 far from its February high of NZ$0.7464.
The currency market was in a wait-and-watch mode, waiting to see what the Fed had to deliver in its announcement of March 17, 2021. The Fed’s stance had an impact on the bond market and the currency markets. Another reason why the NZ, and Australian currencies moved downwards was because the key commodity prices fell.
It was forecast by the economists that Fed would keep the policy settings unchanged and that would have an impact on bonds and yields, what the analysts did not foresee was that Australian and NZ dollar would move downwards. They had hoped that both currencies would keep rising as both the countries are on the path of economic recovery and would benefit from the increase in global trade going forward.
