US bond curve inverts for first time since 2019, NZ curve flattens

The US yield curve has become inverted for the first time since late 2019. Photo / File

New Zealand's yield curve flattened after short US bond yields exceeded 10-year yields for the first time since August 2019.

When yields for short-dated bonds exceed those of longer dated bonds, the curve is deemed to have inverted.

In the United States, inverted yield curves have preceded every US recession in the past 50 years.

Two-year US bond yields, which move with interest rate expectations, rose as high as 2.45 per cent while the 10-year bond yield fell as low as 2.38 per cent.

US two-year yields have risen by 1.64 percentage points this year, reflecting expectations that the US Federal Reserve will take a more aggressive stance to combat high inflation.

Shifts in the US bond market have made for a flatter yield curve in New Zealand.

The NZ two-year swap rate now trades at 3.28 per cent while the 10-year swap is at 3.43 per cent - a gap of 15 basis points.

By the end of 2021 the gap was 45 basis points and a year ago the difference was 150 basis points.

ANZ senior strategist David Croy said it looked like the US yield had gone negative for "mechanical" reasons as the market adjusted to likely moves by the Fed - 50-basis-point hikes against the usual 25-basis-point increases.

"There are plenty of people talking about it potentially being a sign that a recession is just around the corner," Croy said.

"Historically we have tended to see yield curves invert ahead of a recession, so it has been a fairly reliable indicator.

"But it is also a mechanical development."

Croy said the market had heeded a concerted warning by all the Federal Reserve's governors that some hefty rate hikes would be required and that was being reflected in the short end of the US yield curve.

However, Croy noted that the US share market remained buoyant and there were many who would argue that a recession is not on the cards.

"There are people on both sides of the coin."

Higher yields at the short end of the US bond market have rubbed off on New Zealand yields.

"If you like, it has emboldened the local market to price in rate hikes from the Reserve Bank on the grounds that if the Fed is doing it, things are going to be easier for the RBNZ to do it without ruffling many feathers," Croy said.

ANZ expects the New Zealand central bank to raise its official cash rate by 50 basis points when it next reviews monetary policy on April 13 and by another 50 at its monetary policy statement on May 25.

"The reason for that is that we don't think that they can wait for inflation to get out of hand," Croy said.

"They need to move preemptively before that happens."