New Zealand bonds end modestly higher ahead of GDT dairy auction

The New Zealand government bonds closed modestly higher on Tuesday as investors remained cautious ahead of the GlobalDairyTrade price index figure.

The yield on benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.415 percent, yield on 7-year note also dipped 1 basis point to 2.160 percent and the yield on short-term 2-year note ended 1 basis point lower at 1.960 percent.

New Zealand’s Prime Minister John Key has signalled a rapid and unexpected rise in interest rates and "something big that happens internationally" as the biggest threats to the New Zealand economy. Said almost every recession we've had is driven by real interest rates going up and New Zealand has been enjoying economic growth at 3.6 percent of GDP - the highest grow rate in the OECD - on the back of a 70-year low in interest rates.

In term of recent economic data, New Zealand’s September house prices rose +14.3 percent y/y, from prior +14.6 percent y/y. Up 14.3 percent y/y against the August +14.6 percent and QV's index is now 49.5 percent above the market's previous peak in late 2007.

In additon, the RBNZ left the OCR unchanged at 2.00 percent in its September monetary policy meeting and indicated that the central bank will remain 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 down 20.03 points to 7,352.46.