New Zealand bonds sharply rally at close in response to government’s revision of fiscal and economic growth forecasts

New Zealand government bonds sharply rallied at the time of closing in response to the country’s coalition government downward revision of its economic and fiscal forecasts in its half-yearly update released early Thursday.

At the time of closing, the yield on the benchmark 10-year Treasury note, which moves inversely to its price, slumped 6 basis points to 2.78 percent, the yield on 20-year note plunged 7-1/2 basis points to 3.32 percent while the yield on short-term 2-year ended 1 basis point lower at 1.95 percent.

The twice-a-year economic and fiscal update was the first for Labour since it took the helm in October, ending nine years of center-right National Party rule. Labour's plans to curb demand in the housing by banning foreign buyers of existing homes and expanding taxes on investment properties had also led many economists to forecast home prices would drop in the next year.

The Treasury cut its forecast economic growth to 3.3 percent in the year to June 2018 and 3.4 percent the following year, compared to the predicted 3.5 percent growth for each year in the August forecast. Over the long term, the Treasury expected the government spending would help lift economic growth as more money flowed through the economy, and predicted higher GDP for 2020 and 2021 than in August's forecasts.

The government predicted an NZD2.54 billion surplus in the year to June versus Treasury's prior forecast of NZD2.86 billion in its August pre-election economic and fiscal update. It plans to spend NZD32.9 billion from its capital spending budget over the next four years, rising from the proposed NZD26.2 billion in the August update.

Meanwhile, the NZX 50 index closed 0.45 percent higher at 8,360.86, while at 05:00GMT, the FxWirePro's Hourly NZD Strength Index remained highly bullish at 136.77 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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