NZ Govt bond yields hit post-Covid high as inflation concerns mount

NZ 10 year bond yields are at their highest point since the Covid-19 outbreak. Photo / Flie

New Zealand Government 10-year bond yields hit a post Covid-19 high today in line with rising inflation pressures and the likely action that central banks around the world will take to counter it.

By late afternoon the 10-year (2032) bond hit 2.70 per cent - up 10.25 basis points from Friday. There were similar gains in the longer dated maturities.

Local yields were already on the rise but selling in the Aussie bond market added impetus to the selling amid a general air of nervousness.

In the bond market, yields rise when prices fall.

Australian three-year yields were at their highest since April 2019 and Aussie 10 years were nine basis points up at 2.09 per cent.

The selling in the Aussie bond market comes two days before the Reserve Bank of Australia is due to start winding back its bond buying, or quantitative easing, programme.

ANZ senior strategist said David Croy a rise in bond yields in the US had set the tone for world markets, following stronger-than-expected US jobs data and a change in focus from the US Federal Reserve.

The US 10-year Treasury bond traded at 1.930 per cent last Friday - the highest since December, 2019.

The Bank of England last week raised interest rates to 0.5 per cent and nearly half its policymakers wanted a bigger increase.

In a surprise split decision, four of the central bank's nine Monetary Policy Committee members wanted to raise rates to 0.75 per cent.

"Obviously markets read that as being pretty hawkish and people are bringing their expectations forward as to when the European Central Bank is going to hike as well," Croy said.

"Yields are heading higher because of that global reawakening of the central banks.

"Monetary policy globally has been benign for so many years and it has become apparent that over the second half of last year, and into this year, that central banks are going to have to get moving," he said.

"The markets are factoring that in now, which is having a negative impact on bonds."

Movement at the shorter end of the New Zealand yield curve was less pronounced because there is now little disagreement that the Reserve Bank will hike its official cash rate by a quarter of a point to 1.0 per cent at its next opportunity on February 23, and for there to be successive hikes throughout the year.

However, Friday's Reserve Bank survey of inflation expectations will be keenly watched for clues as to what the bank's next move will be.