NZ bond yields fall as post-quake rate cut calls grow

NZ govt bond yields fall as traders punt on post-quake OCR cut

by Paul McBeth

Feb. 24 (BusinessDesk) – The Debt Management Office sold its two-year bonds at a lower interest rate in today’s auction as speculation mounts that the Reserve Bank of New Zealand will cut interest rates in response to the Christchurch earthquake.

The government sold $75 million of its two-year bonds at a yield of 3.65%, 23 basis points below the winning yield at last week's auction.

The bonds were offered at coupon rates of between 5% and 6.5% on maturities of between two and 11 years. The 6.3 magnitude earthquake in Christchurch has caused massive damage to New Zealand’s largest city and the death toll has risen to 92, with grave fears for dozens who remain missing.

Today’s yield drop mirrored the fall in yield in one-year Treasury Bills, which the DMO sold on the day of the quake.

Two-year swap rates are about 3.44%. The yield on two-year government bonds fell 11 basis points to a six-month low of 3.62% in trading today.

“The market had pretty much priced all of this stuff after the earthquake” with the yield on two-year swaps falling 30 basis points in two days, said Imre Speizer, market strategist at Westpac Banking Corp.

“We were starting to pick up, and now we got this bombshell – it’s going to be a grim year.”

Debt markets have rallied since the earthquake, as traders start betting the Reserve Bank will cut the official cash rate when it meets on March 10 to help stimulate an economy that was only just starting to recover after a surprise contraction last year.

No hikes in the official cash rate are priced in over the next 12 months, according to the Overnight Index Swap curve, down from 50 basis points of increases prior to the quake.

Westpac’s economic team is picking Bollard will cut the OCR 50 basis points at his next meeting, and Speizer said two-year yields could go as low as 3.15%, a level not seen since the midst of the global financial crisis.

Still, 3.35% will be its first stop on the way down, he said. Today’s DMO auction didn’t attract any bidders for $50 million worth of five-year bonds, though $75 million worth of nine-year bonds sold at 5.36%, down 7 basis points from the last auction, and $150 million of 11-year bonds sold at 5.57%, down 5 basis points.

Speizer said interest rate markets typically show a greater reaction at the short end, so the prospect of looser monetary policy pushes the yield on shorter-dated interest rates to fall more than longer-dated securities, steepening the yield curve. When rates go up, the opposite happens, flattening the curve.

(BusinessDesk) 18:05:04

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