New Zealand 10-year bond yield dips 34 bps in one week on rate cut hopes, Brexit vote

The New Zealand 10-year bond yield dipped more than thirty four basis points in past one week as investors raised bets that the Reserve Bank of New Zealand will lower its cash rate in the coming months from a record-low rate of 2.25 percent.

Also, last week’s Brexit result made investors risk averse, underpinning demand for fixed income securities.

The yield on benchmark 10-year bond, which moves inversely to its price fell 34.5 basis points to 2.350 percent, as compared to 2.695 percent mark on last Friday (closed down ½ basis points on Friday), yield on 7-year note also dipped 32 basis point to 2.065 percent in the same period and the yield on short-term 2-year note also slid 24 basis points to 2.015 percent (ended lower 1 basis points on Friday).

The ANZ, the fourth largest bank by market capitalisation in Australia, in its report mentioned that it is looking foward to a rate cut from the Reserve Bank of New Zealand in August, driven by the post-Brexit vote turmoil. Also, Westpac, an Australian bank and financial-services provider suggested that the market pricing for the OCR currently implies a 72 percent chance of a cut in August, compared to around 45 percent before the UK vote.

The BoE's governor Mark Carney said the central bank will probably have to ease policy over the summer and the referendum implications for the UK economy are not yet clear, but a 'material slowing' is now the BoE's central forecast.

He further added that uncertainty could remain elevated for some time and have more persistent drag on activity. He also sees risk of tighter financial conditions and of spillovers to other economies. This suggests that a 25 basis points bank rate cut to 0.25 percent can be expected during the August 4 MPC meeting.

On Wednesday, the Reserve Bank of New Zealand released its annual statement of intent on Wednesday in which it reiterated that further easing could still be required. It maintained that New Zealand's financial system remains sound and well placed to support economic expansion, but rapid increases in house prices and low dairy sector incomes pose financial stability risks.

In addition, Governor Graeme Wheeler said the bank is working to understand the current drivers of low inflation and the consequences for the economy and monetary policy. He further added the bank is implementing changes in response to the regulatory stocktake and reviewing key financial policies to best support the soundness and efficiency of the financial system.

Similarly, New Zealand's Finance Minister English said Brexit may increase attractiveness of NZ dollar and if things worsen significantly, the RBNZ has room for a rate cut. Credit rating agencies remain quite positive on NZ economy, he added.

On the other hand, the NZ Prime Minister John Key has downplayed the market expectations that last Friday's Brexit vote makes it more likely that the Reserve Bank of New Zealand will cut the official cash rate (OCR) again on August 11.

Though economists and financial markets increased their expectations that the OCR will again be cut from 2.25 percent after Britain voted 51.9 percent to leave the European Union, with most believing that a cut is near certain. Financial markets are also pricing in higher chances of further cuts to 1.75 percent or beyond.

The New Zealand’s benchmark S&P/NZX50 Index closed up 28.70 points to 6,926.23.