New Zealand bonds close modestly higher after witnessing heavy sell-off following rally in energy prices

The New Zealand government bonds closed modestly higher after witnessing a heavy sell-off in the early trading session on Monday, following a rally in crude oil prices.

Also, investors will remain keen to focus on the upcoming Federal Reserve’s last monetary policy decision for 2016 and third-quarter gross domestic product (GDP) data, scheduled to be released this week.

The yield on the benchmark 10-year bond, which moves inversely to its price, closed 1 basis point lower at 3.33 percent, the yield on 7-year note ended down 1 basis point to 2.89 percent and the yield on short-term 2-year note slid 1/2 basis point to 2.22 percent.

The Kiwi bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of New Zealand's target. Crude oil prices jumped more than 4 percent after OPEC and non-OPEC countries agreed to cut production for the first time since 2001. The International benchmark Brent futures rose 4.16 percent to $56.60 and West Texas Intermediate (WTI) climbed 4.72 percent to $53.93 by 04:50 GMT.

Moreover, the Federal Reserve is expected to increase the target range of the key interest rate by 25 basis points to 0.50 percent to 0.75 percent, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

We expect the Fed to raise policy rates by 0.25 percent at its policy meeting on 14th December. Such an outcome is unlikely to have much impact as it is already fully discounted in markets. Of more interest now will be what guidance the Fed provides on its intentions for next year. The Fed’s current guidance is relatively cautious with the ‘dot plot’ pointing to two rate hikes in 2017, said Lloyds Bank in its research note.

With the economy seemingly close to ‘full employment’ there is a now a case for more hawkish guidance. The sell-off in US Treasuries reflects concerns looser fiscal policy may cause the Fed to move more aggressively. For now, the Fed will probably not change its rhetoric, while it waits to see what fiscal policy measures are enacted, they added.

The Reserve Bank of New Zealand Governor Graeme Wheeler in its recent speech said that the interest rates are probably low enough to return inflation to his 2 percent goal amid a robust economic expansion. He said the exchange rate is higher than the economic fundamentals would suggest is appropriate, but the global forces that have boosted the kiwi dollar may be abating.

Wheeler also reiterated that the bank remains concerned about the booming housing market, which has been fuelled by record-low borrowing costs. House-price inflation is much higher than desirable and poses concerns for financial stability.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 17.26 points to 6,876.04. While at 05:00 GMT, the FxWirePro's Hourly New Zealand Dollar Strength Index stood neutral at -14.73 (lower than -75 represent a bearish trend).