New Zealand bond yields give up gains in closing session after rallying on Fed rate hike expectations

The New Zealand government bonds closed modestly firmer Thursday after witnessing a heavy intraday sell-off as the Federal Reserve November meeting minutes indicated that majority of the FOMC members are in favour of a December rate hike.

The yield on the benchmark 10-year bond, which moves inversely to its price, closed 1 basis point lower at 3.220 percent (rose nearly 10 basis points intraday), the yield on 7-year note also ended nearly 1 basis point lower to 2.83 percent and the yield on short-term 2-year note bounced 6 basis points to 2.19 percent.

Minutes from the 1 - 2 November FOMC meeting indicated that participants generally agreed that based on the relatively limited information received since the September FOMC meeting that the case for increasing the target range for the federal funds rate had continued to strengthen. Minutes indicated that labour market conditions had improved further and considered the firming in inflation and inflation compensation to be positive developments, consistent with continued progress toward the Committee's 2 percent inflation objective.

However, a number of participants expressed the view that some modest slack remained in the labour market or noted that readings on inflation compensation and inflation expectations remained low, alongside some participants who suggested that current conditions did not point to an immediate need to tighten policy or that some further evidence of continued progress toward the Committee's objectives would provide greater support for policy firming.

Nevertheless, most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon as some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting.

RBNZ Deputy Governor Geoff Bascand said that worries among consumers have led to lower inflation across the economy. Also, their concerns have risen since the global financial crisis, with less spending from windfall gains. However, he expects per capita income to gradually pick up the pace in the medium-term.

Moreover, New Zealand once again hits by a powerful earthquake of 6.3 magnitudes off the North Island on Tuesday. The epicentre was 193KM northeast of the capital Wellington, according to the U.S. Geological Survey. Last week, the New Zealand has been struck by a powerful 7.5 magnitude earthquake with its epicentre located on the east coast of the country’s South Island.

Further, the earthquake will disrupt business activity in the short term, but in most parts of the country activity is likely to return to normal in a matter of days. Also, the negative impact on consumer confidence and tourism numbers could last slightly longer, especially if (as seismologists expect) aftershocks continue in coming months.

In addition, the Reserve Bank of New Zealand in its November monetary policy meeting released on November 10, lowered the official cash rate (OCR) once again by 25 basis points, after easing in August, a move is taken for the seventh time since June 2015, in an attempt to boost the slow-moving economy.

However, developments over the past few months have been positive for the New Zealand economy, and the downside risks to the RBNZ’s view have diminished. We expect that the OCR will remain on hold for an extended period. However, longer term rates look set to rise from here.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 31.80 points to 6,883.25. While at 05:00 GMT, the FxWirePro's Hourly New Zealand Dollar Strength Index stood neutral at +28.36 (higher than +75 represent a bullish trend).