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The following is a summary of the key events impacting fixed income markets over the past week.
The Reserve Bank of New Zealand (RBNZ) delivered as expected the first rise in the Official Cash Rate (OCR), raising the OCR from 2.50% to 2.75%. Whilst the move was widely expected, the key is, where to from here?
Aggressive forward track
The RBNZ had kept the OCR on hold for three years but “New Zealand’s economic expansion has considerable momentum” and the RBNZ had to act in order to maintain future average inflation levels near 2%.
“The Bank’s assessment is that the OCR will need to rise by about 2 percentage points over the next two years for inflation to settle around target. That assessment is conditional on the economic outlook, and will be reassessed over time as new data are released and events unfold”.
Therefore, in terms of what the future holds, the RBNZ added between +20bp to +30bp to its 90 day bank bill track out to March 2017. We are therefore looking at an OCR not lower than 5% at the beginning of 2017. If that turns out to be the case then if we assume current borrowing costs, the economy will be facing some headwinds. Currently the floating mortgage rate is around +300bp higher than the 90 day bank bill rate. Floating rate mortgage rates of ~8.0% would certainly slowdown most economies.
Banks quick to react
As we go to print, three of the big five banks in New Zealand have raised their respective mortgage rates. It only took the ANZ one hour immediately after the OCR announcement to raise its mortgage rates. ASB and Kiwibank have since followed and raised their floating mortgage rate by +25bp.
Higher nominal yields – yes / no / maybe
Bond investors and savers alike will be happy that higher interest rates are on their way higher after a number of years of historically low nominal yields. However, offsetting the rise in wholesale interest rates (swap rates are the benchmark that corporate debt is based off) is contracting credit spreads. During a time of economic expansion, credit spreads often contract reflecting happier economic times for corporates. This contraction may well reduce the overall rise in a bond’s nominal yield with the base rate (swap) increasing but the credit spread (margin at which the bond is priced over swap) contracts.
Housing market heading the right way
The bugbear for the RBNZ has been house price inflation, this looks to be under control after house prices gained nearly +9% over the year to the January 2014 quarter. The loan-to-value restrictions are now beginning to fully impact the market and the prospect of higher mortgage rates should see this trend continue.
Now it’s the Fed’s turn
The Federal Reserve, now chaired by Janet Yellen, is fully expected to continue tapering and this will be confirmed when it meets this week. Positive retail sales and employment data in recent times should see Yellen continue in the same fashion as recent meetings.
Corporate / Credit news
ASB launched a Basel III compliant subordinated, unsecured note issue. The tier 2 securities contain loss absorbing characteristics and may be called early after five years on issue. The credit rating of the tier 2 securities is BBB+ with pricing expected to be around the 205bp – 225bp (6.62% - 6.82%). The offer opens 25 March.
Auckland Council opened its most recent bond issue as it aimed to raise up to NZ$150m (plus the ability to raise another NZ$50m in oversubscriptions). The interest rate on the 10-year senior bonds was set at 5.806% p.a.
Contact Energy (CEN) announced it had received NZ$210m of applications for its bonds with the final interest rate being set at 5.80%. Existing bond holders represented over 80% of the applications. CEN will now seek the additional NZ$40m via the General offer.
The details around the Genesis Energy partial sell-down from the Crown were released with 300m to 490m shares up for sale at $1.35 to $1.65 each. The Crown is intending to sell between 30% and 49% of its stake. The final price will be set on 28 March with listing on the NZX expected on 17 April.
The New Zealand Debt Management Office (DMO) received NZ$400m of bids for its offer of NZ$200m of inflation indexed linked bonds. The bonds mature in September 2030 and were sold at an average weighted yield of 2.9257%.
Quayside Holdings (QHLHA) reset the dividend rate on its perpetual preference share at 5.88%. The new dividend rate reflects the set margin of 1.70% over the three year swap rate. The dividend rate will be reset again in March 2017.
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