Rate increase expected
by Livia Yap and Masaki Kondo
New Zealand’s benchmark yield climbed to the highest level in more than two years on bets that the nation is on track to raise interest rates next month.
The country’s 10-year government bond yield rose as much as three basis points to 2.02%, the highest since April 2019. The advance in yields came after Prime Minister Jacinda Ardern lifted the nationwide lockdown outside the largest city Auckland.
The Reserve Bank of New Zealand has been ahead of most of its developed-market peers in winding down stimulus. It ended its bond-purchase program in July. The nation’s benchmark yield is already the highest among 24 advanced economists tracked by Bloomberg. Overnight-index swaps are now indicating market expectations that the RBNZ may raise borrowing costs by more than 100 basis points before the end of next year.
Tuesday’s rise in yields is driven in part by the possibility of a rate hike in October and as “New Zealand’s delta outbreak is looking contained,” said Imre Speizer, head of New Zealand market strategy at Westpac Banking Corp. The 10-year yield can rise to 2.20%, he said.
The central bank refrained from raising interest rates in August, keeping the official cash rate at 0.25%. Governor Adrian Orr said in an emailed update that the decision was made in light of the lockdown.
New Zealand reported 21 new cases of COVID-19 in the community Tuesday. The country will move to Alert Level 2 at midnight Tuesday, allowing people outside of epicenter Auckland to return to work and school.
“We are watching the break higher in 10-year New Zealand government bond yields,” said Rodrigo Catril, senior currency strategist at National Australia Bank Ltd. in Sydney. “The good COVID news implies the market will be encouraged to price a reopening NZ recovery alongside RBNZ rate hikes this year,” he said, adding that it will be supportive of the nation’s currency.
New Zealand’s dollar climbed as much as 0.2% to 71.53 US cents.
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