New Zealand bonds slump at close after government releases Pre-election Economic and Fiscal Update

The New Zealand bonds slumped at the time of closing Wednesday after the government released its Pre-election Economic and Fiscal Update (PREFU), where it reflects policy decisions that were signed off by Cabinet up to 7 August, but do not incorporate any new or upcoming policy announcements.

At the time of closing, the yield on the benchmark 10-year Treasury note, which moves inversely to its price, jumped 4 basis points to 2.94 percent, the yield on 7-year note climbed 3-1/2 basis points to 2.79 percent while the yield on short-term 2-year ended 1 basis point lower at 2.07 percent.

The operating balance (excluding gains and losses) for the June 2017 year is now expected to reach NZD3.7 billion, more than NZD2 billion above the May Budget forecast. This upgrade was more or less in the bag, based on the already-released fiscal accounts for the 11 months to May, though the full-year estimate was even larger than we had assumed. Core Crown revenue and expenses are each estimated to be around NZD1.0 billion better than forecast.

However, the operating surplus is expected to drop back to NZD2.9 billion in the June 2018 year, and future surpluses, while rising, are smaller than were forecast in the May Budget. The Treasury has downgraded its forecasts of nominal GDP growth over the next few years, mostly on the real activity side, but with slightly softer inflation forecasts as well. That implies a smaller tax base than expected over coming years, and a higher spending requirement to some degree.

Meanwhile, the NZX 50 index closed 0.16 percent higher at 7,879.46, while at 06:00GMT, the FxWirePro's Hourly NZD Strength Index remained neutral at -15.44 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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