-thumb.tmb-rs800x600.jpg?Culture=en&sfvrsn=c39fac59_1)
Elevated oil prices flatten the New Zealand yield curve
New Zealand bond yields rose across the curve in September as renewed tensions in the Middle East and elevated oil prices increased concerns over inflation. The rise was most pronounced in the three- to five-year area, resulting in a further flattening of the curve between the five- and 10-year maturities. The curve had already been flattening as the Reserve Bank of New Zealand (RBNZ) concluded its monetary easing cycle and markets began pricing in an eventual normalisation of monetary policy, lifting shorter-term yields more than longer-term yields. More recently, the yield curve flattening seen in September reflected heightened financial market concerns over inflation resulting from higher oil prices. This led markets to price in the possibility that New Zealand’s Official Cash Rate, which currently stands at 2.75%, may need to be moved into more restrictive territory or reach a higher terminal rate to contain inflationary pressures and return inflation to the RBNZ’s 1–3% target band.
Subdued domestic conditions seen limiting second-round inflation
Although oil prices present a near-term inflation risk, we do not expect them to create a sustained inflationary backdrop in New Zealand. Geopolitical conflicts and the associated supply chain disruptions tend not to persist indefinitely, suggesting that upward pressure on oil prices could ease as disruptions subside and conditions normalise. We also find it significant that New Zealand entered the current shock from a comparatively weak economic position, with subdued housing activity and housing-related inflation, low wage growth and significant spare capacity in the labour market. In our view, these factors are likely to limit the second-round inflationary effects of higher oil prices and curb the extent to which interest rates need to rise.
Attractive overall yields seen supporting demand amid higher issuance levels
The recent rise in bond yields has coincided with a marked increase in primary market activity. After a subdued first half, total credit issuance (excluding New Zealand government bonds) picked up materially in August and September of 2026, with over New Zealand dollar (NZD) 4 billion estimated to have been issued in September alone. This would make September’s figure the highest monthly total since 2020. It is also estimated that year-to-date issuance has already exceeded the totals recorded in both 2024 and 2025. The additional supply seems to have been accompanied by strong investor demand, with robust bid coverage indicating continued appetite for high-quality credit. Although credit spreads across most sectors remain near the lower end of their historical ranges in line with a broader trend in global bond markets, higher underlying interest rates have kept bond yields relatively attractive, with investor demand remaining strong.