New Zealand bonds close higher after FOMC lowers rate path outlook

The New Zealand government bonds closed higher Thursday as the Federal Reserve left interest rates unchanged and signalled a more gradual hiking path than previously projected. Also, softer first quarter Gross Domestic Product (GDP) drove investors towards safe-haven assets.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell 1-1/2 basis point to 2.445 percent and the yield on short-term 2-year bonds dipped 1/2 basis point to 2.090 percent.

Following the global debt market, the benchmark 10-Year US Treasury yield dipped to four-month low at 1.541 percent, down 5 basis points and the Australian 10-year Treasury note yield fell nearly 6 basis points to 2.014 percent. The 10-year JGB yield added half a basis point to minus 0.190 percent, after plumbing a record low of minus 0.210 before the BOJ's announcement.

Moreover, the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50% range, in line with market expectations. One key highlight of the statement was the note that the pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up, adding that although the unemployment rate has declined, job gains have diminished.

The June statement reiterated that inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Additionally, the June statement repeated that inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further. In terms of risks, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

In addition, The NZ Q1 Gross Domestic Product (GDP) rose 0.7 percent q/q, marginally higher than the market consensus for 0.5 percent, but lower from previous 0.9 percent q/q in the last quarter of 2015. Also, Q1 GDP rose 2.8 percent y/y, beating market expectations of 2.6 percent, from 2.3 percent during the same period a year ago. The latest growth was driven by the construction and health industries, but partly offset by decreases in the primary industries and manufacturing.

The NZ bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the RBNZ's target. Today, crude oil tumbled more than 1 percent for six straight days, dragged by a somewhat disappointing U.S. oil data and looming risk of Britain’s departure from the European Union. The American Petroleum Institute (API) showed U.S. crude inventories rose by 1.2 million barrels in the week to June 10 to 536.7 million, against market consensus for a decrease of 2.3 million barrels. The International benchmark Brent futures fell 0.80 percent to $48.56 and West Texas Intermediate (WTI) dipped 0.90 percent to $47.58 by 05:35 GMT.

The New Zealand’s benchmark S&P/NZX50 Index closed down 19.01 points to 6,888.57.