New Zealand 10-year bond yields likely to touch 2 pct mark, ideal time to go long

The New Zealand government bonds closed higher Friday as investors speculated that the Reserve Bank of New Zealand (RBNZ) will lower its key interest rate in its November monetary policy decision. Also, we foresee that the 10-year bond yield is expected to fall to 2 percent mark; going long is the ideal strategy at this point of time.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 7 basis points to 2.295 percent, the yield on 7-year note ended 6 basis points lower at 2.060 percent and the yield on short-term 2-year note slid 4-1/2 basis points to 1.910 percent.

The 10-year bond yields have fallen nearly 33 basis points in just seven days after the RBNZ hinted to lower the official cash rate further in November based on inflation figures, at its last monetary policy meeting held on Wednesday.

Last week, the RBNZ left the OCR unchanged at 2.00 percent as was widely expected. Much of the language in today’s statement was repeated from August, indicating that the RBNZ remains on track for an OCR cut at the November review. Despite solid economic growth, the RBNZ faces an uncomfortably slow return to the inflation target, with the risk that this could drag inflation expectations even lower.

We foresee that the central will hold its key interest rate until it examines the upcoming third quarter inflation, which is scheduled to release in late October. However, given the current market situation 25 basis points cut in November is widely anticipated among the investors.

“We expect the RBNZ will cut the Official Cash Rate twice more, rather than sit idly by while the NZD soars and inflation undershoots the target ad infinitum,” said ANZ in a report to clients.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 17.64 points to 7,361.09.