New Zealand

NZ bonds look very mispriced, to me. 4.73%, when PMI’s are in the sink, building consents are falling sharply (FBU downgrade today) wobbly and erratic GDP prints, retail sales well below inflation, and anchored inflation expectations. Inverted curve to boot. Just let your eyeballs peruse the below mix of graphs…


It’s the sort of thing that suggests to me (unless we forgot how to make things) inflation should absolutely return to target, and rates, if they operate at all with a lag, should be lower.

But, perhaps aggregate demand is less directly the culprit, or the carve outs of aggregate demand that we look (e.g. the sorts of economic timeseries data above) at less relevant, or perhaps the framework we use is simply wrong.

But, if not, 4.73% will look very good in the light of history.

We care about NZ, because, to us, NZ is a good comparable to Australia. Small, open, with lots of household debt that has been driven by ever increasing house prices, most of which are on variable rate mortgages. Its configuration, proximity, and similar population flow dynamics (strong pop. growth) make us think what happens there can well happen here.

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