Bonds retreat as Kiwi dollar dives

Scott Murdoch (The Australian)

THE worldwide jump in bond yields inspired by US Treasuries last week has retreated marginally in some markets as analysts consider whether the sudden shifts can be sustained.

In restricted trade around the world yesterday, some bond yields fell back slightly, especially in the New Zealand trading session. But in early London trade, the march of yields on US 10-year bonds continued with 10-year Treasuries adding 1 basis point. The bond yield was fluctuating at 5.12 per cent, after last week's rally added 15 basis points. The Reserve Bank of New Zealand sent shock waves through the financial markets yesterday when it confirmed it had intervened in its foreign exchange market.

For the first time, the central bank sold New Zealand dollars in a bid to bring the powering Kiwi under control. The policy prompted the market to speculate that monetary policy tightening would now end, with rates at 8 per cent. The front end of the yield curve on New Zealand government paper shifted downwards on the likelihood of no further interest rate rises.

Economists said the market believed that the Reserve Bank of New Zealand would not raise rates at the same time as selling currency to suppress the NZ dollar. On the back of the news, the currency fell from US76.20c to US75.25c, with further downward pressure expected to emerge today.

The shift created a positive tone for the Australian dollar, which will probably benefit from the New Zealand move because of the carry trade. Carry trade investors will further favour the Australian dollar, despite the increase in New Zealand interest rates last week. Last night, the domestic currency was hovering at US84.26c, up 0.025c. Analysts said the dollar could stay above the US84c market in the medium-term, as that level was seen as the next technical barrier for the currency.