New Zealand bonds close lower on profit taking, investors shrug off disappointing trade data

The New Zealand government bonds closed lower Wednesday as investors cashed in profits after relishing previous gains. Also, investors shrugged off disappointing July trade balance data.

The yield on the benchmark 10-year bond increased 2 basis points to 2.295 percent and the yield on 7-year note also ended ½ basis point higher at 1.965 percent and the yield on short-term 2-year note also bounced 1/2 basis point to 1.790 percent.

New Zealand trade balance fell more-than-expected to a deficit of 433 million in July, above the market expectations of 325 million deficits, as compared to a surplus of 127 million in June. Additionally, exports fell to 3.96 billion, the consensus was for 4.07 billion, from 4.26 billion. However, imports rose to 4.40 billion, market consensus was for 4.45 billion, compared to 4.13 billion in June.

On Tuesday, in a speech written for the Otago Chamber of Commerce, Governor Graeme Wheeler said the economy does not need rapid easing, but if inflation expectations fall too far, it can be very difficult to raise them back up. In such a situation, even further cuts in interest rates would be needed to stimulate economic activity and increase inflationary pressures.

An aggressive monetary policy that is seen as exacerbating imbalances in the economy would not be regarded as sustainable, and would not deliver the exchange rate relief being sought, he added.

He further added that the present judgement is that the current interest rate track, involving an expected 35 basis points of further interest rate cuts, balances a number of risks weighing on the economy, while generating an increase in CPI inflation back towards the mid-point of the 1 to 3 percent target range.

Moreover, the Kiwi 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. Additionally, tumbling crude oil prices limited the growth in bond yields.

The crude oil prices declined more than 1 percent as Iraq prepared to increase its exports and renewed concerns that upcoming producer talks will not rein in oversupply. Also, worries about expanding Chinese fuel exports dragged oil prices. The International benchmark Brent futures fell 1 percent to $49.45 and West Texas Intermediate (WTI) dipped 1.29 percent to $47.48 by 05:00 GMT.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 57.03 points to 7,410.30.