New Zealand bonds gain ahead of next week's RBNZ meeting

The New Zealand bonds closed higher to finish off the week on Friday as investors were cautious ahead of Reserve Bank of New Zealand's (RBNZ) monetary policy meeting scheduled on June 9.

Also, slowdown in Chinese PMI shifted investors towards safe-haven assets. The yields on the benchmark 10-year bonds, which move inversely to their price fell three basis points to 2.635 percent and the yield on short-term 2-year bonds dipped 2-1/2 basis points to 2.090 percent.

The Reserve Bank of New Zealand's interest rate decision is due next week, although investors are pricing a 20 percent chance of a rate cut. We foresee that the Reserve Bank of New Zealand (RBNZ) is widely expected to leave the Official Cash Rate at its record low of 2.25 percent, after having cut 25 basis points. Even so, we expect the RBNZ to adopt a stronger easing bias, signalling further rate cuts ahead (albeit conditional on the data).

Today, May ANZ commodity price index rose 1.0 percent from -0.8 percent in April. However, on a y/y basis the index is down 11.7 percent. Moreover, New Zealand Q1 building work rose 5.3 percent q/q, against market consensus of 1.0 percent, marking the biggest Q1 rise for two years.

Lastly, we foresee the RBNZ cutting rate in June to around two percent is less likely, but expectations of a rate cut in August remains on. The Central bank may act on the housing market if they cut any further. However, the bank has not signalled any cut in the next policy meet in June, retaining its easing bias. Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index increased 21.25 points to 7,024.37.