2016.11.0700:53:00UTC+00New Zealand Bonds Close Modestly Higher on Rbnz’s Easing Hopes; Firm Global Yields Limit Fall

The New Zealand government bonds closed modestly higher Monday on rising speculation that the Reserve Bank of New Zealand will lower its official cash rate by 25 basis points to a new record low of 1.75 percent in its Thursday's monetary policy meeting.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.800 percent, the yield on 5-year note ended nearly 1 basis point lower at 2.338 percent and the yield on short-term 2-year note slid 1 basis point to 2.100 percent.

Global Treasury prices jumped after FBI Director James Coney released an official statement saying that Hillary Clinton has been cleared and they did not change any conclusions that were expressed in July with respect to Secretary Clinton. This announcement removed clouds of suspicion around her campaign and potential Presidency.

The Reserve Bank of New Zealand’s decision on the OCR is due out 9th November and Graeme Wheeler’s intimations that further cuts are required going forward certainly seem to hint that rates could be lowered.

“We expect the Reserve Bank to reduce the OCR to 1.75 percent next week. The RBNZ has strongly signalled a further easing, and failing to deliver could lead to an unwanted and self-defeating market response. Beyond next week’s decision, the RBNZ is likely to retain a mild bias towards further easing. But we expect the OCR to remain on hold through 2017,” said Westpac in its research note.

We also support the fact that the Reserve Bank of New Zealand is still widely expected to cut rates at its November 10 policy meeting to 1.75 percent.

Last week, the RBNZ’s fourth quarter two-year inflation expectations slightly rose to 1.68 percent, from previous projection of 1.65 percent. Also, 1-year expectations increased to 1.29 percent, as compared to previous estimations of 1.26 percent. We foresee that this marginally firmer inflation projection will not cheer the central bank as inflation expectations still remain low.

Treasury prices are expected to rally this week as investors assume that the triumph of Republican Party nominee Donald Trump over Democratic Clinton will weaken the greenback against major trading currencies, while boosting demand for safe-haven assets.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 163.80 points to 6,872.27.