Inflation pushes bond yields to new high

New Zealand shares were generally lower Thursday as market interest rates climbed to new highs after surprisingly strong inflation data in Australia increased the odds of interest rate hikes.

Thursday, October 28th 2021, 6:41PM

by BusinessDesk

“The domestic rates market was rocked by the Australian inflation shocker,” said BNZ interest rate strategist, Jason Wong.

Data showed inflation rose 0.7% in the September quarter, putting annual inflation inside the Reserve Bank of Australia’s target range at 2.1%.

This saw the yield curve flatten significantly as rates across the board hit fresh highs for the current cycle, he said.

The yield on a 2-year government bond is now comfortably above 2% – up from negative yields this time last year – and 10-year bonds are yielding 2.6%, up from 0.5% a year ago.

Higher bond yields are a real headwind for the S&P/NZX 50 Index, which fell 50 points, or 0.4%, to 12,970.99 on Thursday. Turnover was $135 million.

Most equities are priced relative to risk-free interest rates, such as government bonds.

In the past week, analysts at Craigs Investment Partners have downgraded both My Food Bag and Eroad because of an increase in spot risk-free rates – as measured by the 10-year bond yield.

The NZ share market is disproportionally populated by yield-sensitive sectors such as property and utilities.

Analysts at Forsyth Barr today reiterated their negative stance on the electricity sector due to “regulatory risk and rising interest rates”.

Genesis Energy declined 2.3% to $3.20, Mercury NZ was down 1.9% at $6.05, and Meridian Energy fell 1% to $4.98.

Shares in Air New Zealand dropped 2.4% after chair Therese Walsh said the airline expects to have drawn down $900m of its government loan by February.

This would leave the airline with just $600m of emergency funding left and increase the pressure to complete its twice-delayed, billion-dollar capital raise. 

Sky Network Television was unchanged at $1.88 as it reiterated it was on track to deliver its first annual increase in revenue in more than five years.

The pay-tv company is hoping to increase revenue to $35m on the expectation streaming revenue will eclipse the decline in Sky box revenue.

The NZ dollar was trading at 71.60 US cents today, unchanged from yesterday but up from 69.76 cents ten days ago.

Global currency traders are mostly obsessing over inflation, which is a positive for the kiwi as the Reserve Bank of New Zealand is trusted to hike rates to keep it under control, Wong said.

Tags: Market Close

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