NZ dollar gains, interest rates on the move as 10-year bonds hit post-Covid high

The Kiwi dollar has lifted and 10-year bond yields are at their highest point since Covid-19 was first discovered in New Zealand early last year as the market chooses to look through the impact of the latest outbreak.

The price action also reflects expectations that there will be a series of rate hikes from the Reserve Bank before the year is out.

The latest level 4 lockdown became effective on the night of August 17, a day before a keenly anticipated interest rate decision from the Reserve Bank.

In the end, the bank kept the rate at 0.25 per cent while the market, before the latest outbreak, had universally expected a rate hike.

Since then the Kiwi has been on firming trend.

It recently traded at US71.50c – well up from US68.39c on August 18.

Key government 2032 bond yields are up at 1.94 per cent – their highest point since late February 2020 which Covid first emerged here.

Days after its official cash rate decision, Assistant Governor Christian Hawkesby said the central bank had decided not to raise interest rates because of communication challenges, not economic risks.

Hawkesby told Bloomberg that it would have been difficult to explain an increase in the official cash rate on the same day the country entered a lockdown to combat a Covid-19 outbreak.

He also said policy makers considered raising the OCR by as much as half a percentage point.

“It was less about Covid stopping us doing it and it was more about the timing of communicating our policy move – was the 18th of August the right day as the country went into lockdown?” he told Bloomberg.

The comments left little doubt that the Reserve Bank is eager to embark on a tightening cycle at its next review on October 6 and won’t be deterred by the current delta outbreak, which prompted the first nationwide lockdown in more than a year.

“In the bond market there are a couple of things going on but the main one is that the market is getting ready for the Reserve Bank to be the first major central bank to tighten rates,” ANZ senior strategist David Croy said.

“There is a widespread expectation that we are going to get three rate hikes in a row come October, November and February, and that’s putting a bit of upward pressure on the market.

“There is also an expectation of bond supply over the next little while, which is going to put upward pressure on yields as well,” Croy said.

Croy said the main reason for the gain in yields was that the Reserve Bank had suggested that rates would continue to go higher.

On future OCR moves, Croy said: “Really the market has taken the view that it’s really just a timing thing rather than a change of tack.”

“The interesting story is the currency. It got down to the mid US68s and now its over US71c again,” he said.

Initially, the market had reacted to the decision to pause but apart from the occasional wavering here and there, the currency has tried to look through the impact of the latest outbreak.

Assisting the Kiwi’s gain was the US dollar, which come under downward pressure after Fed Governor Jay Powell’s comments at the Jackson Hole retreat were taken to mean that rate hikes in the US are still a very long way off.

Separately the New Zealand market is preparing for a new 30-year, 2051 bond to come on stream.

The Treasury has indicated that it is going to issue between $2 and $3 billion of the new bond, by way of a syndication.

The transaction is due to start on September 13, subject to market conditions.

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