(Bloomberg) -- New Zealand’s key yield curve ended inversion as the nation’s central bank edged closer to cutting interest rates.
The spread of 10-year bond yields over two-year yields flipped to a positive four basis points on Wednesday as shorter duration notes rallied. The curve may be as steep as 10 basis points by year-end from possible policy easing, while longer-dated debt is set to underperform on government refinancing, according to Mark Smith, a senior economist at ASB Bank.
The steepening comes as policy-sensitive two-year bonds have risen around twice as much as the benchmark 10-year note this month. A sluggish economy and slowing inflation have boosted bets the Reserve Bank of New Zealand may cut rates as early as August.
While the curve has previously turned positive twice this year, “you can still get false starts,” said Philip Brown, head of research at FIIG Securities in Melbourne. “Once the market is convinced rate cuts are coming, front-end yields can drop quickly.”
Global yield curves have steepened recently amid the prospect of central bank rate cuts by year-end. That of the UK turned positive earlier this month as investors priced the start of the end of tight monetary policy as early as August.
US yield spreads have tightened, registering a negative 21 basis points on Wednesday amid a rally in two-year notes in anticipation of a Federal Reserve rate cut in September. The curve has also steepened as side-effect of the so-called Trump trade, referring to those bets seen benefiting from Donald Trump’s advocacy of looser fiscal policy, higher trade tariffs and weaker regulation.
To be sure, the process in New Zealand may be gradual, with Westpac Banking Corp. seeing a positive slope holding next year after remaining flat through year-end. FIIG’s Brown also predicts moderate steepening as long-dated yields can be dragged down by their US peers, while the RBNZ may only ease policy slowly initially.
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