Interest rate differentials: Advantage New Zealand?

Market players have also been attracted to the relatively high yields offered by Australia and New Zealand. Their key rates, comparable to the U.S. Fed Funds rate, stand at 5.5 percent and 6.75 percent, respectively. Official interest rates in Australia have been on hold since they were last raised in March. In contrast, New Zealand hiked its official rate to 7 percent on Oct. 27, the eighth hike since the beginning of last year. Another hike in December is also possible.

Although the yield pick up for the U.S. (3.75 percent Fed Funds rate, which will likely rise to 4.25 percent by year-end) and European investors (2.0 percent key rate, with the ECB likely on hold for at least several months), is substantial, it is even more significant for Japanese investors, where overnight interest rates remain close to zero and 10-year bond yields are around 1.45 percent. Australia’s 10- year bond yields are around 5.35 percent and New Zealand’s 10-year bond yields are just below 6 percent.

A number of corporations, including Germany’s agriculture and forestry financial corporation Rentenbank, supranational agencies such as the World Bank, and sovereigns such as the Province of Ontario, have offered New Zealand dollar-denominated bonds in Japan aimed at retail investors.

Reports suggest Japanese retail investors have shifted their preference from Australian fixed-income instruments to New Zealand denominated issues. At a little less than NZD $20 billion, the issuance of these bonds, called “uridashi” and “eurokiwi,” are running at nearly twice as much as last year’s levels and appear to be an important source of demand for the New Zealand dollar.