Harbour Navigator 2/04/2019

New Zealand government stock yields fell to record low levels across all maturities last week, as the Reserve Bank acknowledged the weaker global economic outlook and the ensuing risks to the domestic economy. We think:

• The economy has slowed but is still growing.
• Bond yields appear to be pricing in a recession, which seems unlikely.
• Rate cuts in New Zealand are not a done deal.

The decline in yields has been dramatic this year, with the benchmark 10-year yield falling by 0.6% to 1.75%. On the back of the Reserve Bank’s comment that “the more likely direction of our next OCR move is down”, the market has priced in an OCR rate of 1.3% in February 2020, down from 1.75% at present.