Kiwibank raises its special two year fixed mortgage rate to 4.15% from 3.99%, bringing an end to sub-4% mortgages

ASB has offered me 4.05% fixed for 1 year. Should I take it, or wait until after the OCR review?

That didn't last long. Means they must if got a ton of interest and lent out enough at that rate in the short time they offered it. I expect asbs longer rates may be getting a lot of interest too and may not be around for long.

5 year fixed under 5% is amazing. Certainly enough to get old tIme investors back in the game in the regions where yields generally exceed 5%.

looks like next OCR change will be August? Discussion on other blogs long term rates (3yr+) heading slowly up. Gut feeling there is still downward pressure in the short term. Anyone getting below 4.3 for 3 years?

good news. Maybe common sense will be back after all.

Hi all, with a couple of big mortgages totalling $2.5m I broke the term with ANZ in early March at cost of $48k. We were on 5.89% with 1.5years to run on a 3 year mortgage. I chose to do this to take advantage of the low interest rate environment and my medium term strategy is to aim to stay short on the terms and commit to shopping around when terms expire. In short, to treat the banks as a commodity. Relationship management and transaction based perks to me bring no material benefit that makes a difference. The banks will always do business if you are a good and viable opportunity. I am able to claim half of the break cost as an expense against my rental. In choosing to break with ANZ, I ran some basic math and stood to save 35-40% of my mortgage payments AND recover the break fee within the year if I could land a low 4% or sub 3% rate. After breaking with ANZ I floated for two months to negotiate with three banks and settled on 3.75% for 1 yr + $12K cash with HSBC. Their floating rate offered is also .2bp below their best carded rate. I waited the two months to migrate from ANZ floating 4.8% because there were instant savings going to floating, to take risk the OCR would drop (which it did in April) and to shop around. As I signalled to my ANZ bank manager I was taking going to break the mortgage they offered to reduce break fee to $10k. I said yes but give me sub 4%. That was touching on TAPU territory for them and the best they could offer was 4.09% for one year. So I used a broker and tested the market. Westpac, BNZ much if a muchness with an aversion to sub 4% as well. Their best rates were 4.05 and 4.19. Both offered $15 and $18k cash as well. I refused because they wouldn't go sub 4 and tied me up to repay the cash if I moved in three years. Not good enough. By this time ANZ did not compete or attempt to match the other two either. HSBC were my backup and stood out among the pack with a great advertised rate of 3.95% so I approached them. They were brilliant. I pushed lower than their special carded rate and settled with 3.75% 1yr + cash amount of $12k. So have achieved everything I wanted. There you go....bared my details in the interest of sharing to empower the banking customer fraternity:-)

Inflation

If you are a bondholder, what is your greatest enemy?

Inflation.

Think about it. If you own a 10-year piece of paper yielding 2% and inflation is running at 3%, you actually have a real yield of -1%. That doesn’t sound very good. As it stands right now, real interest rates in the 10-year space are just slightly above zero.

For those of you who have a little bit of background in this, interest rates have a nominal and a real component. The nominal component compensates you for inflation. The real component reflects the supply and demand for loanable funds.

When there is an excess supply of loanable funds (like after the Fed has printed a lot of money), interest rates will be depressed, as they are now. When there is an excess demand for loanable funds, like when there are lots of investment opportunities, interest rates will rise.

This is all academic. But the academic stuff works sometimes, too.

Jared Dillian
I Wouldn’t Buy a Bond with Your Money

This one is going to cause some cognitive dissonance, because many of the people you trust and rely upon for financial insights (including others here at this firm) are bullish on bonds and think that interest rates will go even lower.

I do not.

I think they will go higher, and I have a fairly well-reasoned case.

First, a chart of 10-year yields over the last 10 years:

And going back a lot further than that:

Let’s step through this bit by bit.

Inflation

If you are a bondholder, what is your greatest enemy?

Inflation.

Think about it. If you own a 10-year piece of paper yielding 2% and inflation is running at 3%, you actually have a real yield of -1%. That doesn’t sound very good. As it stands right now, real interest rates in the 10-year space are just slightly above zero.

For those of you who have a little bit of background in this, interest rates have a nominal and a real component. The nominal component compensates you for inflation. The real component reflects the supply and demand for loanable funds.

When there is an excess supply of loanable funds (like after the Fed has printed a lot of money), interest rates will be depressed, as they are now. When there is an excess demand for loanable funds, like when there are lots of investment opportunities, interest rates will rise.

This is all academic. But the academic stuff works sometimes, too.

So here is a chart of inflation (CPI):

You can see that it is starting to turn up. Yes, inflation is low, but it’s the direction that counts.

So why would you buy a bond when inflation is getting ready to ramp up?

Worse, there are plenty of indications that inflation is going to run further. 10 years ago, inflation was running about 3–4%, but people were saying that we didn’t really have inflation, because we didn’t have wage inflation.

Well, guess what: now we are starting to have wage inflation. People are very noisy about this with respect to the minimum wage, and by the way, after the last year or two, almost nobody pays the minimum wage of $7.25 an hour anymore. Walmart, TJ Maxx, and many others have all raised wages on the low end.

This feeds into expectations, where people come to expect more and more pay increases. And when people demand and receive pay increases, they have more disposable income and drive up the price of goods and services.

So if we didn’t have “real” inflation before, do we have “real” inflation now?

Supply

Leaving aside the anti-immigration stuff for a moment, I’m not a fan of Donald Trump. For one reason and one reason only: the debt.

A few weeks ago, in Forbes, I argued that a President Trump would be very bad for the bond market. Let’s talk this through.

Donald Trump wants to cut taxes. He wants to cut the top marginal rate from 39.6% to 25%, and all the other tax rates as well. He wants to make it so most people don’t pay taxes at all. The “cost” of this tax plan is about $1.3 trillion, but if we dynamically score this and say that there will be economic growth as a result of it and the government will take in more revenue (the supply-side argument, which I agree with), let’s just assume it’s a trillion-dollar tax cut.

Trump also wants to…

Build a wall

Deport people

Build infrastructure

Have Trumpcare

Increase defense spending (exclusive of military adventures)
Let’s say that on the expense side, this costs an additional $1 trillion (Trump is not a small-government conservative).

So the deficit, which is currently at about a half-trillion, goes to $2.5 trillion, or about 15% of GDP, the highest in history.

The debt is little more than an abstraction to most people, but the mechanics of what happens when a government runs a large deficit is that the treasury will increase the size of its bond offerings. So if the US Treasury is offering $20 billion of bonds every quarter, and the deficit doubles, it will be offering $40 billion of bonds every quarter. There’s an increase of supply, and without a corresponding increase in demand, investors will demand price concessions and interest rates will rise.

This is the argument Robert Rubin was making about the debt in the 1990s. And he was right.

Under a Trump regime, the volume of bonds that would be offered for sale would skyrocket. Never mind Trump’s creditworthiness in general, and the fact that he’s made an entire career of screwing creditors. I would not want to lend money to the US government under such circumstances.

Under Hillary Clinton, the situation would be better, but only marginally, because over time, our entitlement programs will grow more and more expensive (and untenable).

Conclusion

I have about eight other bullet points to make, but I try to keep The 10th Man succinct. Let’s be clear—the bond market is as overpriced as it has ever been, right at the moment that the fundamentals have completely broken down.

Where does the exposure live? With you, the retail investor.

There are hundreds of billions in household assets in fixed-income mutual funds, retirement and nonretirement. After a 1% rise in interest rates, people will discover what the meaning of “duration” is.

But that is a topic for another time.

Jared Dillian
Editor, The 10th Man