The Reserve Bank of New Zealand unexpectedly cuts interest rates in a "dovish" manner, boosting steepening yield curve trades

According to the Zhitong Finance APP, the so-called "steepening" trades conducted by global bond funds have now received support from the Reserve Bank of New Zealand. On Wednesday, the Reserve Bank of New Zealand first announced a rate cut and then issued an unexpectedly dovish statement, causing the country's 2-year government bond yield to drop by 16 basis points as traders adjusted their interest rate expectations. This is good news for investors betting on a steepening yield curve, as this strategy profits when the gap between long-term and short-term bond yields widens. Meanwhile, the yield on New Zealand's 30-year government bonds only fell by about 7 basis points.

For investors betting on a steep yield curve, aside from the risks of fiscal spending and trade wars affecting long-term bonds, this news further indicates that there is still room for their bets to continue—New Zealand bonds now face increasing steepening yield curve pressure alongside U.S. Treasuries and Japanese government bonds.

Prashant Newnaha, senior Asia-Pacific interest rate strategist at Toronto-Dominion Bank, stated: "The Reserve Bank of New Zealand is sending a signal that even with expected gradual inflation increases, the possibility of rate cuts still exists. The widening spread is part of this trading strategy." The bank is the highest-ranked foreign institution predicting interest rate trends in New Zealand.

On Wednesday, the Reserve Bank of New Zealand lowered the interest rate to 3%, the lowest point in three years, citing reduced spending by businesses and households, falling house prices, and uncertainty in the global economic policy outlook. The central bank's latest forecast indicates a significant possibility of two more 25 basis point rate cuts by the first quarter, which is an adjustment from previous expectations that suggested another cut before early next year.

Michael Brown, senior research strategist at Pepperstone Group Ltd., stated: "This move will undoubtedly stimulate investors to buy the front end of government bonds. Globally, there is currently no reason to be optimistic about the back end of the bond market."

Swap traders are fully pricing in another rate cut in New Zealand this year. Market data shows that the likelihood of the Reserve Bank of New Zealand further cutting rates at its February meeting next year exceeds 75%.

Later on Wednesday, the bond market received another surprising piece of news: Indonesia's central bank cut its benchmark interest rate by 25 basis points to 5%. James Wilson, senior portfolio manager at Jamieson Coote Bonds in Melbourne, stated that the global easing economic cycle means that five-year bonds are expected to perform better across various markets