“In 2007 when the correlation was lower, swap spreads were at historic wides, suggesting greater independence of moves between NZ swaps and bonds. In the year ahead we expect swap spreads to remain fairly range- bound and moves in bonds and swap to be closely linked.” Martin adds.
Moreover, the correlation of NZ swap yields to offshore factors has increased in recent years. This represents increased cross-asset-class correlations globally. According to Martin, “The global financial environment has become increasingly defined by ‘risk on’ and ‘risk off’ phases (in response to perceived European/US/China risks). There is less opportunity for idiosyncratic factors to drive diverse performance.”