Via Damien Boey at Credit Suisse:
The RBNZ has surprised, by cutting rates 50bps at its meeting today. Further, Governor Orr has given some fairly dovish guidance, mentioning that the Bank has done its homework on unconventional easing measures, such as outright asset purchases. The AUD and Australian bond yields are following the NZD and New Zealand lower, as if to say that the RBNZ is leading the way.
We can understand why investors are looking for guidance, even from the central bank of a smaller economy. Bonds are rallying frenetically, cornering central banks into easing. Indeed bond yields everywhere are now undershooting long-term neutral rates by such a big margin, that the “term risk premium” concept is losing meaning. Part of the reason why we are seeing the undershooting is technical – inverted yield curves, with backwardated bond volatility surfaces encourage fixed income investors to short volatility to buy short duration bonds. Part of the reason is fundamental. Investors sense that rate cuts might not be that effective in stimulating credit creation and asset price inflation, nor that effective in driving competitive currency devaluation if everyone else is trying to do the same thing.
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