Benchmark 10Y NZGB yield falls to new low tracking global debt market

The New Zealand benchmark 10-year government bond fell to all-time low on Tuesday, following cues from global debt market. Also, investors were cautious ahead of potentially seismic events this month including Britain’s referendum on European Union membership, Bank of Japan and the Federal Reserve meeting.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell 1-1/2 basis point to 2.505 percent and the yield on short-term 2-year bonds dipped 1 basis point to 2.105 percent.

Following the global debt market, the benchmark 10-year US Treasury note yield seen marching lower towards 1.60 percent mark. German 10-year bund yields continue to hover at record low on Monday, after testing its 2015 low of 0.05 percent last week, are likely to test zero soon as investors remained cautious ahead of the Federal Reserve meeting and Britain’s referendum. The 15-year JGB yield dip below zero for the first time, it is down at -0.001 percent and the benchmark 10-year JGB yield hit a fresh all-time low of -0.162 percent.

The NZ bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the RBNZ's target. Today, crude oil prices fell as investors stay risk-averse ahead of a referendum that could end Britain's membership in the European Union. Apart from this, prices were also weighed by the prospect of bigger crude stocks in the U.S. The International benchmark Brent futures fell 0.79 percent to $49.95 and West Texas Intermediate (WTI) dipped 0.96 percent to $48.41 by 05:45 GMT.

In addition, The New Zealand May food price index fell -0.5 percent m/m, from up +0.3 percent in April, which raised the prospects for future RBNZ easing.

Looking ahead, we foresee that the central bank could lower its official cash rate further if core inflation continues to trend downward, as the RBNZ indicated. If inflation and GDP growth fail to improve over the coming months, such a move will occur sooner rather than later. We see that the possibilities of the RBNZ cutting rate in September to around 2% is high as the NZD is trading near the upper range against the greenback. The apex bank may act on the housing market bubble if they cut any further.

Lastly, markets will remain keen to focus on GlobalDairyTrade (GDT) Price Index and Q1 GDP figure on Wednesday. The New Zealand’s benchmark S&P/NZX50 Index closed down 89.32 points to 6,834.95.