Determinants of New Zealand bond yields

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Kelly R. Eckhold
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This paper examines the driving factors of New Zealand bond yields over the 1988-1997 period. The results indicate that: - the general analytical framework implied by the Uncovered Interest Parity (UIP) relation finds some support in the data. - in the long run, short term real bond yields are related to US real bond yields, currency expectations and expectations of the future stance of domestic monetary policy vis a vis the stance offshore. - long-term real bond yields are related to Australian real bond yields, currency expectations, inflation uncertainty and relative monetary policy expectations. - in recent years, domestic bond yields have been more closely related to offshore yields suggesting increased integration between the domestic and international capital markets. - increased perceptions of political risk appears to have played an important role in the rise in domestic long bond yields during the first half of 1996.