NZ bonds close higher as oil prices fall on global supply glut

The New Zealand government bonds closed modestly firmer on Friday after oil prices fell to fresh April lows as slowing economic growth threatened to worsen ongoing oversupply of crude and refined products. The yield on the benchmark 10-year bond slid 1/2 basis point to 2.210 percent, the yield on 7-year note also dipped 1 basis point to 1.965 percent and the yield on short-term 2-year note ended 1 basis point lower at 1.835 percent.

The New Zealand bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of New Zealand's target. The crude oil prices hit its lowest since May following sluggish global demand and supply glut concerns.

Also, the EIA in its latest report mentioned that the US crude inventories climbed to a seasonally adjusted annual rate of 1.671 million barrels, the consensus was for a fall of -2.257 million barrels, as compared to -2.342 million barrels in the preceding month. The International benchmark Brent futures fell 1.34 percent to $42.66 and West Texas Intermediate (WTI) dipped 0.78 percent to $40.82 by 12:00 GMT.

Moreover, the Reserve Bank of New Zealand in its unscheduled economic outlook update, released last Thursday concluded that it is likely that further policy easing will be required as a decline in the exchange rate is needed.

The central bank added the monetary policy will continue to be accommodative and long-term inflation expectations are well anchored. Also, the NZ dollar rate is holding down tradable good inflation and currency markets make it difficult to meet inflation objective.

The surprised assessment mentioned that more easing is possibly needed to return inflation to target as many uncertainties hover around the country’s economic outlook.

We foresee that the RBNZ will go for further rate cuts to counter deflationary pressure if inflation fails to revive, which is way below the target range of the central bank.

Lastly, investors will remain keen to focus on the next week’s employment report. Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 41.78 points to 7,348.13.