By Roger J Kerr
The current picture and outlook for interest rates has changed dramatically as a result of the Christchurch earthquake disaster.
The interest rate yield curve is clearly now going to be steeper for longer this year, as short-term interest rates remain low and the long-end is driven by US Treasury Bond movements.
Investors who were anticipating higher market interest rates in the second half of 2011 will now have to wait six further months before seeing any lift.
Both retail and institutional investors should therefore be keen on any five-year offering of corporate bonds at yields above 6.00%.
That expected investor market demand will not be met by the large NZ prime corporate borrowers who have already filled their debt requirements from the longer-term US private placement debt market. Therefore expect to see the second-line corporates issuing new bonds to the investors and repaying shorter term and pricier bank debt.
I anticipate that the RBNZ will deliver to market and economist’s expectations of a 0.25% or 0.50% cut to the OCR on March 10th, more as a symbolic and psychological gesture to show that they are doing what they can to assist business conditions and confidence in the aftermath of the earthquake disaster.
Let’s hope that the lending banks gets the message that they may also have to sacrifice some margin compression and drop their base lending rates to SME’s and home mortgage borrowers.
Just because the OCR is cut it does not automatically reduce the banks’ cost of funds.
The banks cost of funds is already well established and fixed at 5.00% plus from the rates they have paid retail depositors and from higher cost longer-term offshore debt issues.
The core-funding ratio imposed and regulated on the banks by the RBNZ since the GFC means that there is no longer a direct connection/linkage between the OCR and the banks’ funding costs.
Without the goodwill of the banks to come to the party on this, the OCR cut will have no benefit for most borrowers. It would be useful if the RBNZ Governor properly explained this bank cost of funds situation in his March 10th Monetary Policy Statement.
The pressure is on the banks from the RBNZ and Government to lower floating and fixed rate mortgage lending interest rates.
Market wholesale one, two and three year swap interest rates have decreased 0.30% to 0.40% since last Tuesday (back to March 2009 lows). However, the swap markets are "non-funded" in that they do not involve physical lending and depositing of the principal amounts.
The swap rate falls are not necessarily mirrored by the banks’ cost of funds reducing for those time periods.
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* 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
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1 Comments
Good to see someone other than a paid banmk economist or commentator relying on the banks advertising to bring the reality of the banks current excessive interest margins.
The commentary makes a lot of sense but unfortunately we are sucj a small economy we can be dictated to by the foreign banks.
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