By Roger J Kerr
While the total focus of interest rate market commentators in New Zealand has been the low inflation environment and thus the RBNZ “on hold” for another 12 months, the real risk and driver of medium to long term interest rates has very little to do with New Zealand at all.
The OCR and thus 90-day market interest rates may well remain at 3.50% for another 12 months, however totally independent to the NZ economy and that scenario going forward is the fact that our three to 10 year term interest rates follow the direction of US Treasury Bond yields.
The risk of increasing three to 10 year interest rates is very real and immediately upon us.
There have been a number of false starts to US bond yields increasing off their lows over the last two years. However, US bond yields have again been lifting over recent weeks as global fixed interest investors took the opportunity of the stronger US dollar in FX markets to reduce their weightings of bond holdings (realising the cash gains on both the currency and bonds).
As US short-term interest rates increase over the second half of 2015, further increases in their long-term bond yields can be expected.
New Zealand bond and swap interest rates have moved in lock-step with US bond yields for many years, however over recent weeks the 50 basis point increase in US 10-year bonds from 1.60% to 2.10% has not been matched by the same magnitude of increase in our 10-year swap rates.
Investor demand into NZD denominated Kauri Bond issues (offshore borrowers issuing NZD debt and swapping back to their own currency) has for the meantime held our swap interest rates down.
The 10-year swap rates have only increased from 3.65% to 3.85% over the same time period the US yields have increased 0.50%.
History tells us that our 10-year swap rates do not diverge from the US bond yields in this manner for very long.
A catch up seems inevitable.
The US bond market is not the only bond market to suffer from investors selling and sending yields higher in recent weeks, German 10-year Bund yield have snapped higher from 0.08% to 0.36%.
Another 0.50% increase in US bond yields from 2.10% to 2.60% over coming months could well see NZ 10-year swap rates increase by up to 1.00% to 4.85%, to return the correlation to the relationship of June/July last year.
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
Daily swap rates
Select chart tabs
Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
10 Comments
***yawn*** 7 years wrong Roger and counting.
Any day now we might get inflation. What you and many (especially on the Right) are doing is excluding the cost of energy and that impact on our hvy industrialized global economy. As long as you continue to do so you will be wrong on the long term trend.
****yawn**** Any day now we might get over " peak oil " , and wake up to the amazing developments in solar energy and battery storage , such as Elon Musk's plans to build 500 000 house batteries per year , to store XS energy produced during the day from roof-top solar panels ... Musk calls it the " Power Wall " , and claims it is the missing piece in a sustainable future for mankind ..
Solar isnt a transport fuel, you have to use batteries or convert it. How many houses in NZ GBH? how many in the world? How many ppl can afford EV cars?
"claims" and reality and not the same thing. Math, time, scale, physics, geology these are laws/facts, wishful thinking losses to them.
and looking at that trend?
http://www.rbnz.govt.nz/statistics/key_graphs/inflation/
or,
http://www.tradingeconomics.com/new-zealand/inflation-cpi
though I prefer core,
http://www.tradingeconomics.com/new-zealand/core-inflation-rate
Of course like inflation if you do nothing about it, defaltion turns up/gets worse. If of course you take steps to prevent it, yeah sure it wont happen. So the OCR is a low by NZ standards and yet the CPI is also down there and still, CPI well.
Analysis: these two data points that normally correlate have become decoupled, therefore A will catch up to B.
Pretty simplistic argument but okay, I'll bite. Why is it taken for granted that it's NZ swap rates that have to 'catch up' with US rates, as opposed to US rates having run way ahead of where they ought to be?
Haha, just kidding, that would kill the "HIGHER RATES COMING FOR REALS THIS TIME" headline.
Youse Guys swapping punch for punch, blow for blow and lower dollars for the loser had better get with the program, boxing is the way to go.....
Some swap a few points and add up the benefits. Many bets, much hype, no killings made, bar two at the BANK...
The winners, maybe 1%.....and that is today's Capitalism in a NUTSHELL.
My brain hurts from all the Pumping and Dumping, never mind a few bouts in the ring. And all over in seconds....in fact the seconds did not have to do much...a bit like a fix between BANKS....if ya get my drift. ...Nanoseconds to swap a few dollars and cream off the profits....trading blows.!
There must be an Apt App for it somewhere...why work be happy, stop banging yer head against a brick wall...fighting for every Dollar..... Youse Guys are losers...
Think BIG.
Cheers...thanks for the money...suckers....
Yours Floyd......
(Half a billion a head....cannot be all bad)....but it suddenly stopps ringging when they hit the BELL.
Yowser. Manny hands make light work.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.