New Zealand Bond Yields Race Toward Zero as Rate Cut Bets Mount

(Bloomberg) -- New Zealand bonds may soon join the world of zero-yielding debt as traders ramp up bets that the central bank will keep easing to counter the coronavirus-driven slowdown.

Two-year yields slid to a record low of 0.10% on Tuesday after Westpac Banking Corp. economist Dominick Stephens said the policy rate could turn
negative this year. Speculation that the central bank may boost its quantitative-easing program next month is also turbo-charging the rally.

The bets reflect expectations that the Reserve Bank of New Zealand will widen its array of unconventional monetary policy tools to counter the economic slowdown fueled by the coronavirus pandemic. Governor Adrian Orr said last week he hasn’t ruled out negative interest rates although they aren’t the best tool for now.

“Governor Orr is clearly open to the idea of moving the OCR below zero in New Zealand,” Sean Keane, managing director of Triple T Consulting Ltd., wrote in a note. “The market itself will start pricing for a negative rate scenario by the fourth quarter if the coronavirus crisis lingers.”

Two-year bond yields have plunged more than 1 percentage point this year after the RBNZ joined peers from Europe to Japan in easing policy. It cut the benchmark rate by 75 basis points to 0.25% in March and swaps show markets are expecting rates to fall to around zero by the first quarter of 2021.

The central bank’s debt purchases are adding fuel to the bond rally. It bought NZ$6.75 billion ($4 billion) of government bonds in the first four weeks of its QE program and is set to exhaust more than a quarter of its buying plan by the end of this week, boosting expectations it will announce a significant increase at its May 13 policy meeting.

“We expect the RBNZ will double its QE program to NZ$60 billion,” Westpac’s Stephens wrote in the note.

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