New Zealand bonds close higher after rating agencies downgrade UK credit rating

The New Zealand government bonds closed higher Tuesday after as two top rating agencies downgraded its sovereign credit score, judging last week's vote to leave the European Union would hurt its economy.

The yield on benchmark 10-year bond, which moves inversely to its price fell 1 basis point to 2.345 percent, yield on 7-year note also dipped 1 basis point to 2.055 percent and the yield on short-term 2-year note tumbled 1 basis point to 2.015 percent.

The S&P announced that it has cut the UK’s sovereign credit rating to AA, from previous from AAA. According to S&P, the outcome of the UK’s EU referendum will lead to less predictable, stable, and effective policy framework in the UK.

The S&P, an American financial services company also added that they have reassessed their view of the UK's institutional assessment and now no longer consider it strength in their assessment of the rating.

Similarly, rival agency Fitch lowered UK’s sovereign credit rating from AA+ to AA, forecasting an "abrupt slowdown" in growth in the short-term.

Moreover, the NZ Prime Minister John Key has downplayed market expectations that Friday's Brexit vote makes it more likely the Reserve Bank of New Zealand will cut the official cash rate (OCR) again on August 11. Though, economists and financial markets increased their expectations the OCR will be cut again from 2.25 percent after Britain voted 51.9 percent to leave the European Union, with most seeing a cut as near certain. Financial markets are also pricing in higher chances of further cuts to 1.75 percent or beyond.

"I don't think so in the short term, primarily because what he's looking at is the strength of the economy," Key told Guyon Espiner on RNZ when asked if Brexit made an OCR cut by Governor Wheeler more likely in the short term.

"And if you look at his last Monetary Policy Statement he effectively had growth at a slightly stronger rate than the Treasury, he's north of 3 percent. I think he will look at the world markets. One could argue he's got room to move if he needed to," he said.

In addition, Australia and New Zealand have agreed to work together on the "big issues" Brexit presents to both countries, including trade and immigration, Australia's Prime Minister Malcolm Turnbull said.

Lastly, the New Zealand May trade balance rose to 358 million, against expectation of 182 million, from 292 million in April. Exports rose 4.57 billion (consensus was for 4.31 billion), from 4.30 billion in April, while imports rose 4.22 billion compared to market anticipation of 4.15 billion, from 4.01 billion in April.

The New Zealand’s benchmark S&P/NZX50 Index closed up 29.65 points to 6,716.58.