Opinion: Why long term rates will rise even further

By Roger J Kerr Long-term interest rates in the US continue to move higher as investors sell bonds to shorten their portfolio durations. The 10-year Treasury Bond yields have stormed above 3.00% to 3.45% over the last couple of weeks as the wall of new supply stacks up in front of a nervous market. No-one wants to be on the wrong side of this market and not too many are calling for US bond yields to decrease. No great surprise then that the NZ 10-year swaps have reversed from 5.40% a week ago to 5.90% today. Perhaps some nervousness in our swaps and NZ Government Bond interest rate markets ahead of Thursday's budget as well. The RBNZ can lower the short-term interest rates all they like, but increased issuer supply and "yet to be found" investor demand is going to drive the long-end of the yield curve in respect to bond and swap yields. The risk always was that these long-term interest rates would increase, they are certainly doing that now, and there is much more to go yet. Central banks in the UK and US will seek to sell back at some point in time the Government Bonds they purchased a few months ago when they did their "quantitative easing". Not only will Governments around the world be issuing more bonds, but some of their central banks will be major sellers of bonds as well. The rising level of long-term interest rates has nothing to do about current deflation and potentially higher inflation next year, it is all about investors requiring a higher return to make the decision to invest. The New Zealand Government needs to sell its increased supply of bonds in world markets. To be enticed in, these international investors will need a risk premium well above US and Australian Government bond yields. Any major borrower who has not hedged by now to the maximum amount and term allowed by their interest rate management policy needs to re-examine their financial management priorities. So called "advice" from some parties to take more risk in the lower floating interest rates is very short-term in focus and lacking accountability to debt funding cost outcomes over a multi-year time-frame in my view. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. 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