By Roger J Kerr
The spate of weaker US economic data over recent weeks provided the opportunity for borrowers to take advantage of the lower long term swap interest rates driven down by US 10-year Treasury Bond yields falling to 1.60%.
The US bonds have oscillated between 1.5% and 2.0% for a number of years now with periodic global “flight to quality/safe haven” capital flows pushing the yields back down and stronger US economic data cause them to increase.
My view is that US economic data will not fall away though their summer as it has done in recent years after successive strong starts to each year.
Last Friday’s US Non-Farm Payroll increase of 165,000 new jobs in April is pointing towards improving economic numbers and thus renewed market speculation of when and how the Fed will taper-off the current QE monetary stimulus.
While the last FOMC meeting confirmed that the Fed is prepared to both increase and decrease monetary stimulus (depending on the data), the smart money appears to be favouring the US unemployment rate reaching the 6.5% target sooner than what most expect.
Increasing US bond yields over coming weeks will suggest that global fixed interest fund managers, hedge funds and US corporate borrowers will be having more confidence about an earlier Fed withdrawal of stimulus.
The direction of US bond yields over coming weeks will have a greater impact on our wholesale swap interest rates from three years onwards than any local economic data, the May budget or investor/borrower activity in New Zealand.
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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
4 Comments
Last Friday’s US Non-Farm Payroll increase of 165,000 new jobs in April is pointing towards improving economic numbers and thus renewed market speculation of when and how the Fed will taper-off the current QE monetary stimulus.
Hmmmm - While everyone was focusing on the quantitative component of today's BLS number, it appears what was once again missed in all the noise was the mention of the qualitative aspects of the BLS report: those parts which actually look at the quality of new jobs, not only their earnings power (which as we showed in the breakdown of the April job gains were all toward the lower paying spectrum of available jobs) but also taking productivity and labor demand into the picture. It is here that we find this month's biggest BLS report weakness. Read article
And lets not forget, Table A-15. Alternative measures of labor underutilization. U6 remains an unfortunate blemish on US employment ambitions.
C'mon - interest rates are surely going to drop in NZ - Europe and USA are gonna be in strife for at least 5 more years and now all the news coming out of Aussie looks ominous. You gotta be dreaming if you think interest rates will rise - low interest rates are with us for many years ahead. Kiwis need to put more pressure on banks for lower rates - the bank margins are currently extremely high!
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