Yesterday, benchmark bond yields took a steep dive.
Ten year US Treasury bond yields fell on Friday (our time) to just 1.78% although they recovered somewhat today to 1.81%.
These are low rates, levels last seen in April 2013.
However, the real impact and some drama is actually being played out in New Zealand swap markets.
Because it is the long dated bond yields that are falling in New York, that is pressuring our New Zealand wholesale rates down, especially for those of four years duration and longer.
The drama is that the yield curve will start on Monday virtually flat.
The oft-quoted 2-10 curve is at a miniscule 7 bps. (That is, there is only a seven basis point rate premium for 10 year interest rate swaps over a two year.)
The mortgage-important 1-5 year curve is just 9 bps.
Both represent steep shifts from this time last week when each was over 20 bps.
This table gives a good idea of how the rate curves have flattened.
| 2 yr swap | 5 yr swap | 10 yr swap | 1-5 curve | 2-10 curve | |
| daily start rate | rate % | rate % | rate % | bps differential | bps differential |
| 19 January 2015 | 3.73 | 3.78 | 3.80 | +9 | +7 |
| 12 January 2015 | 3.83 | 3.94 | 4.03 | +21 | +20 |
| 1 January 2014 | 3.88 | 4.76 | 5.30 | +133 | +142 |
| 1 January 2013 | 2.71 | 3.14 | 3.81 | +51 | +110 |
| 1 January 2012 | 2.79 | 3.37 | 4.12 | +67 | +133 |
| 1 January 2011 | 3.80 | 4.73 | 5.53 | +134 | +173 |
| 1 January 2010 | 4.57 | 5.53 | 6.09 | +187 | +152 |
| 1 January 2009 | 4.35 | 4.73 | 5.04 | +46 | +68 |
| 1 January 2008 | 8.50 | 8.06 | 7.56 | -69 | -94 |
Readers with a long memory will recall that our rate curves inverted in 2005 and stayed inverted until mid-2008.
Inverted yield curves are actually not common, despite their presence in New Zealand in recent history. They indicate that investors demand higher short term rates than long term ones, seeing more risk in the short term than the long. That is often suggesting the market believes it is facing an impending recession - but it is not a foolproof signal.
We are a whisker away from an inverted rate curve in New Zealand as we start out 2015.
Even if we don't actually 'go negative' the situation will have an important influence of mortgage market wholesale costs.
And it will cause considerable head-scratching at the RBNZ. The next RBNZ OCR review is on Thursday, January 29, 2015 and markets are expecting no change to the 3.5% policy rate.
However, with the two year wholesale swap rate currently at 3.73% and the five year at just 3.78%, they place the OCR setting in an odd point. It looks even odder when the 10 year wholesale swap rate is just 3.80%.
The accompanying Statement with the next OCR review will be scrutinised closely for signals.
Daily swap rates
Select chart tabs
9 Comments
If banks can offer 2 years fixed mortgage at 5.5% with a swap rate for 2 years at 3.73% then they should be able to offer the same for 5 year fixed mortgages at 5.55% given the 5 year swap rate is now 3.78.%. These banks are totally rorting consumers right now particularly on credit cards where in NZ they are making $800m profit per year off the rolled over credit card debt balance that is not being reduced.
Once the ECB commence their massive QE program swap rates should reduce further and it should only be a matter of weeks before banks can offer 2,3 or 5 year mortgages for as little as 4.75% maybe less! So don't be fooled by the banks - why let them get away with a massive margin increase when they should be passing the saving on. Just because you can afford a 5.5% mortgage and it seems cheap is no reason to hold back from bargaining
Bigblue - whilst it may sound sensible on the face of it to some, its not correct. Banks have to apply more capital to longer dated loans i.e. the swap rate for the period is only part of the equation before their margin to cover other costs and a profit is applied.
It will be sad if the RBNZ doesn't drop the interest rate and pressure banks to do the same.
There's going to be a lot of fresh printed ECB flax looking for a nice interest differential to call home. It would be a shame to all that profit going to off shore banks rather than passed on to New Zealanders.
There is no good reason for the RB to lower the OCR, Let the rest of the world get madly drunk on Free Money - and have the inevitable hangover. There is however, plenty the RBNZ could do to discipline the Banksters here but given its track record in feather- bedding the bandits for decades, one should not hold ones breath.
Ergophobia
Cowboy - the OCR is of no relevance to the levels that fixed mortgage rates are set at. There is nothing Wheeler or the Reserve Bank can do to prevent the slump in swap rates, deflation, commodities etc that are ahead of us. Wheeler may think he has insulated us against the future downturn but you can't fight the inevitable! Really nobody including these government bankers have lived through the times we are now in and predicting anything economic is nigh on impossible.
Interest, because every time it moves so do the banks interest rates, and the RBNZ has said in the past that if banks (the actual lenders) don't pass on the OCR drop (the banks license to make more free money) then they will take extra action to ensure costs are passed on to end consumers (ie that stimulus will occur, not just extra bank profits)
Surely 2015 will finally see the end of bank economists excitedly proclaiming that interest rates will be rising anytime soon, trying to entice borrowers to fix long term to avoid rate rises. How many borrowers are kicking themselves that they were mislead into long term fixed rates at 6.x% when mortgage rates will be dropping below 5% this year?
Even the banks are finally admitting in the past week that deflationary forces outside NZ and low interest rates will be impacting the NZ economy and that interest rates are unlikely to increase and are more likely to flatline and/or decrease.
So it has taken 2009 to 2014 for the 'economists' to realise the ongoing impact of the 2008 GFC and other nations policies since then.
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