NZ Government bond yields sink to record lows as global fears mount

10-year government bonds traded at their lowest point since the market was formed in 1985. Photo / File

New Zealand 10-year government bonds traded at their lowest point since the market was formed in 1985 as the world's central banks, spooked by worries about global growth, backtracked on their tightening plans.

The 10-year bond traded at a record low of 1.88 per cent, a far cry from its record high of 19.2 per cent in May 1985, and following the trend in the world's major credit markets.

Government bonds beyond two years maturity are at record lows and some are below the Reserve Bank's 1.75 per cent official cash rate - right out to the 2027 maturity (1.73 per cent).

"This is a globally-led decline in interest rates mainly from the United States and Europe because their central banks have reversed their stance on signalling a tightening of monetary conditions and backing off any tightening plans in view of the slowdown in global growth," Imre Speizer, senior market strategist at Westpac, said.

Bond yields have been trending downward since the 1980s as central banks around the world introduced inflation targeting in response to the runaway prices of the 1970s.

"Since 1985 we have been in a secular decline - the trend has been in one direction - in good part due to inflation being tamed from its 1970s peak," Speizer said.

Inflation targeting since then had made inflation more subdued and yields had fallen along with it.

The second part of the bond yields story came with the 2007-8 global financial crisis (GFC), which resulted in central banks loosening the reins on monetary policy to stave off a world-wide depression.

Since then, inflation has not bounced back to the levels that it was expected to, and yields have fallen further still.

"Yes, inflation is under control, but it has perhaps been too subdued in the last 10 years and the questions still remain unanswered as to why," Speizer said.

"The direction of interest rates remain, to this day, pointing downwards," he said.

Short dated securities were going nowhere while yields in longer dated paper were falling, reflecting heightened risk aversion, Speizer said.

Ultra-low bond yields have followed the US Federal Reserve's unexpectedly downbeat outlook last week which saw investors seeking the safe havens.

Bonds work inversely to yields - when bond prices go up, yields go down.

With economic data still weak and stalled, central banks have been forced to abandon moves to tighten monetary policy.

The yield on the benchmark 10-year US Treasury note fell on Monday to its lowest level since December 2017 as fixed-income investors continued to worry about global growth and a potential deceleration in the US economy.

Those fears kept the Treasury yield curve inverted during the session, with the yield on the 3-month bill above that of the 10-year note.

The short-term rate first exceed that of several longer-term securities last week in a phenomenon known as inversion and viewed by many as a recession predictor.

Other big fixed-income markets have also been affected since the Fed's commentary last week.

Yields on both the German 10-year bund, as well as the Japanese 10-year traded in negative territory this week.

New Zealand's Reserve Bank reviews its official cash rate tomorrow.

Economists expect the bank to keep the rate steady at 1.75 per cent, but opinion is divided as to what the bank's next move will be up or down.