NZ 10-year bond yields expected to breach 2 pct mark for first time on RBNZ likely rate cut

The New Zealand 10-year bond yields are expected to sink below 2 percent for the first time post the likely rate cut by the Reserve Bank of New Zealand. The central bank is expected to cut its official cash rate by 25 basis points to 2.00 percent in the upcoming monetary policy meeting, which is scheduled to take place on August 10.

Interestingly, Bloomberg’s implied probability of 25 basis points rate cut by the RBNZ is at 100 percent. Also, 20 out of 25 economists polled by Bloomberg expected a 0.25 percent rate cut on next Thursday.

Moreover, inflation is likely to stay low for an extended period and since the labour market has lost momentum this year, we speculate a higher possibility for further monetary easing. We also think that the risks of strengthening New Zealand dollar will factor into the decision.

Meanwhile, Kiwi bonds plunged Thursday after the benchmark S&P/NZX 50 stocks index rose 0.3 percent, following modest gains on Wall Street. The yield on the benchmark 10-year bond rose 2 basis points to 2.235 percent, the yield on 7-year note also climbed 2 basis points to 1.960 percent and the yield on short-term 2-year note ended 1/2 basis points higher at 1.825 percent.

In terms of recent economic data, New Zealand’s July ANZ commodity prices rose 2.0 percent m/m, from higher 3.7 percent in June. In addition, second quarter average hourly earnings rose 0.8 percent q/q, lower than the consensus of 0.9 percent, from 0.3 percent in the previous quarter.

Lastly, in the latest GlobalDairyTrade (GDT) auction world dairy prices have shot higher, with the GDT price index jumping 6.6 percent since the last auction in mid-July, most likely reflecting concerns about tightening supply.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 20.68 points to 7,298.08.