Opinion: Massive increase in bond supply to underpin rates

By Roger J Kerr Just where and when our interest rates will bottom is partially dependent on what happens from here in the US Treasury Bond market. Both the Federal Reserve and the US Government have been wanting to get the 10-year Treasury Bond yield down, as most housing mortgages are priced-off these interest rates. The need to stabilise the free-falling US residential real estate market, lower mortgage interest rates are absolutely key for this. The 10 year bond has fallen away to 2.50% from 4.00% over recent weeks. This will be a pleasing trend for them. Leading indicators for bond yields such as the ISM Index and jobs numbers say that a 2.50% yield is justified, but not any lower. Looking ahead the worry has to be whether 2.50% will be a high enough yield return to entice global investment funds to finance the additional Government bonds the US will be issuing to pay for all the bail out packages. The same could be said for NZ - will 5.00% bond yields be high enough to attract money to fund the increased supply of Government bonds which are needed to fund the upcoming budget deficits? The additional supply of Government bonds coming onto fixed interest and moneymarkets around the globe next year, must underpin a floor that long-term interest rates will not go below. The markets will not be thinking of these issues yet, but eventually the changed supply and demand equation will mean they will have to.    --------------- *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