New Zealand bonds rally following revival in global debt market; weak dairy prices lend support

The New Zealand government bonds rallied Thursday following a revival in the global debt market post-FOMC December meeting minutes. Also, investors poured into safe-haven assets as dairy prices posted their largest fall over ten months at the first dairy auction of 2017.

In intraday trading, the yield on the benchmark 10-year bond, which moves inversely to its price, fell 8 basis points to 3.25 percent, the yield on 7-year note dipped nearly 7 basis points to 2.87 percent and the yield on short-term 2-year note slid 4-1/2 basis points to 2.21 percent.

The Kiwi bonds have been closely following developments in the U.S. debt market. The benchmark 10-year bond yields fell 23 basis points to 2.41 percent in just three weeks.

Minutes from the 13 - 14 December FOMC meeting indicated that most participants judged that a gradual pace of rate increases was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation (currently expected to be roughly 75 basis points of tightening over the course of 2017).

A gradual pace was also viewed by some participants as likely to be warranted because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks to the aggregate demand for goods and services.

However, while viewing a gradual approach to policy firming as likely to be appropriate, participants emphasised the need to adjust the policy path as economic conditions evolved. They pointed to a number of risks that, if realised, might call for a different path of policy than they currently expected (highlighting increased uncertainty regarding fiscal and other economic policies). As to be expected policymakers are likely to maintain current views until further details surrounding fiscal policy are revealed.

Moreover, the dairy product prices have fallen at Fonterra's GlobalDairyTrade auction, sliding for a second consecutive auction as whole milk powder prices unexpectedly sank amid increased volume on offer.

The GDT price index fell 3.9 percent to $3463, down from $3656 at the previous auction two weeks ago. Some 22,396 tonnes of product was sold, edging up from 22,321 tonnes at the previous auction. Whole milk powder dropped 7.7 percent to $3294 a tonne.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed flat at 6,975. While at 05:00 GMT, the FxWirePro's Hourly New Zealand Dollar Strength Index stood neutral at +58.33 (higher than +75 represent a bullish trend).