New Zealand bonds close modestly higher as stocks suffer on weak risk appetite ahead of U.S. presidential election

The New Zealand government bonds closed modestly firmer Thursday as investors poured into safe-haven instruments at the end of the trading session after S&P/NZX 50 stock index declined more than 1 percent on subdued risk appetite ahead of the U.S. presidential election.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.755 percent, the yield on 5-year note ended nearly 1 basis point lower at 2.263 percent and the yield on short-term 2-year note slid 1 basis point to 2.065 percent.

The market is wary of a Brexit-like outcome at the presidential election on November 8 as recent polls showed a tighter race between the two Presidential candidates. The RealClearPolitics poll displayed that Democratic nominee Hillary Clinton’s lead over her Republican rival Trump has narrowed down to 2.2 percentage points from more than 7 points two weeks ago.

Treasury prices are expected to rally this week as investors assume that the triumph of Republican Party nominee Donald Trump over Democratic Clinton will weaken the greenback against major trading currencies, while boosting demand for safe-haven assets.

Moreover, the Reserve Bank of New Zealand’s decision on the OCR is due out 9th November and Graeme Wheeler’s intimations that further cuts are required going forward certainly seem to hint that rates could be lowered.

“We expect the Reserve Bank to reduce the OCR to 1.75 percent next week. The RBNZ has strongly signalled a further easing, and failing to deliver could lead to an unwanted and self-defeating market response. Beyond next week’s decision, the RBNZ is likely to retain a mild bias towards further easing. But we expect the OCR to remain on hold through 2017,” said Westpac in its research note.

We also support the fact that the Reserve Bank of New Zealand is still widely expected to cut rates at its November 10 policy meeting to 1.75 percent.

The RBNZ’s fourth quarter two-year inflation expectations slightly rose to 1.68 percent, from previous projection of 1.65 percent. Also, 1-year expectations increased to 1.29 percent, as compared to previous estimations of 1.26 percent. We foresee that this marginally firmer inflation projection will not cheer the central bank as inflation expectations still remain low.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 74.81 points to 6,778.94.