By Bernard Hickey
It's been called the "Bondcano" and the "Trumpocalypse of the bond markets" to impress upon regular savers and borrowers just how important the events of the last fortnight have been.
Since November 4 the US 10 year Treasury bond yield has risen from 1.77% to almost a one-year high of 2.26%. That doesn't sound dramatic, but it represents the fastest increase in the most important interest rate in the world in more than seven and a half years. It means investors holding US Government debt and other bonds that are priced off this benchmark just lost more than US$1 trillion.
It means all sorts of longer term interest rates have risen sharply since the election of Donald Trump as US President as investors start to worry the host of The Apprentice would cut taxes, increase the cost of imports and spend money willy nilly in a way that will push up inflation globally.
New Zealanders can't ignore these events either. The closer observers of mortgage rates can see how it has already started to roll through into our own housing markets. In recent days ASB, BNZ and Kiwibank have all increased their longer term fixed mortgage rates by between 10 to 30 basis points.
More importantly the sharp jump in US bond yields has unnerved investors with over US$150 trillion in bonds and loans to Governments and companies globally who had assumed that interest rates would stay low and that a 30-year-long trend of ever-falling interest rates would just keep on going.
They're now asking themselves if they should all try to get out the exit door at the same time. The rout is threatening to turn into a stampede that could destabilise global financial markets, particularly in Europe where banks are seen as vulnerable and economies can't easily handle higher interest rates.
Some are describing this jump in bond yields as the 'Trump Thump' and it is a shock that will reverberate well beyond his wall and the shores of America. Many emerging economies such as China and Latin America have become dependent on borrowing in US dollars at US interest rates. If Trump does something to reduce imports from China and Latin America, these economies face the double whammy of slowing export revenues just as their borrowing costs rise sharply.
There's actually a triple whammy for many of those emerging market borrowers because they often borrow in US dollars and therefore have to repay and service their debts in US dollars. The rise in US interest rates and expectations Donald Trump could unleash a spending and tax-cutting spree has made the US dollar more attractive and pushed it up 4% since his election. That has crystallised at least two legs of the triple whammy.
All this pressure has also forced the Chinese yuan down to a six-year low and into the territory where Donald Trump could accuse the Chinese Government of artificially weakening the currency in way that hurts US workers and triggers the 35% tariff he has threatened.
All bets are off on China remaining the engine room of growth for the New Zealand and Australian economies if this triple whammy of the bondcano, a currency crisis and a trade war eventuated.
Meanwhile, the rise in market interest rates adds pressure to a New Zealand housing market that has come off the boil since the Reserve Bank announced new restrictions on lending to rental property investors in July in tandem with banks such as ANZ and Westpac starting to tighten their lending policies for landlords and apartment developers.
The rise in interest rates will also make life slightly more expensive for the Government, which now faces billions in extra borrowing over the next couple of years to pay to rebuild the main trunk route through Kaikoura. New Zealand's 10 year government bond yield has risen from 2.8% to 3.2% since Trump's election and is up from a record-low 2.13% in August. To be fair, longer term interest rates have been bottoming out since August and short term interest rates have also risen for different reasons. US regulators forced fund managers to sell their bank debt to buy Government debt, which pushed up short term money market rates, and many expect the US Federal Reserve to hike next month.
Trump has barely started to select his cabinet Apprentice-style, and he has already delivered a multi-billion dollar thump to bond and property values globally and here. As much as we'd like his wall to block off the Trump-effect from the rest of the world, no-one is immune in the still globalised world of free floating interest rates and exchange rates.
A version of this article also appears in the Herald on Sunday. It is here with permission.
58 Comments
Panic not. The world's central planners, in their misguided Soviet inspired way, have been unsuccessfully trying to generate "inflation" since 2008. Now that inflation is rising, we are supposed to panic?
Why are interest rates rising worldwide? Is it because activity and opportunity are picking up? Which means there is competition for money rather than an excess? Interest rates just reflect the general level of opportunity, ie, when people have competing choices they choose the higher rate.
Most definitely, M3 money supply has been outpacing the needs of the economy at an escalating pace. From 10% more than GDP 10 years ago, to 43% today (it varies a bit). Inflation of the money supply IS inflation, just forget the official nonsense that is CPI and look for where it is showing up. Asset price inflation fuels by the credit bubble.
But the pace has been slowing since QE stopped. NZ is not isolated.
Question is if the value of Trumps fiscal measures can outpace the destruction of the asset bubble. Is he really going to burst it? Even if he does nothing it will still burst without QE.
Can increased economic growth and tax receipts fund the additional cost of funding? Western Government debts are still going through the roof and interest costs will become a biggest percentage of Government tax receipts...another burden for the Millenials to fund the lifestyles of the baby boomers.
The last Auckland housing bubble was stopped by rising interest rates (to over 10%!) and the GFC. Maybe Trump's affect on the bond market and elsewhere will be the trigger this time, because NZ seems to lack the will to try other options.
There is a historic look at Auckland's housing market here https://medium.com/@brendon_harre/housing-affordability-learning-from-e…
Lots of other housing and urban planning article here https://medium.com/@brendon_harre
If this new bond interest action starts the correction, then bring it on.
A few investors will get singed and more hopefully the hot moneyed overseas speculators will head back offshore.
Key and English should relish the opportunity to show their expertise(?) in managing our rockstar economy to a new level. ( to Ed. Hope this does not offend your political taste)
I am not saying Trump will cause a Auckland housing market correction. Markets are not that predictable as Bernard Hickey has learnt. But almost certainly if the government does not act to make the housing market more affordable and competitive. If the one way bet of property investment is not addressed then a some point there will be a market response.
BB3 yes the Auckland/NZ housing market is completely ridiculous. I have written extensively about it -follow the links from my attached article above. The solutions are all staring us in the face. We all know that more could be done to help Generation Rent if only the politicians were not so concerned about Generation Own. The issue is political will....
If we continue our current course we will continue to have excessive booms and busts in the property/construction sector. So the fear some politicians have of the consequences of doing something which might trigger a house price correction in the long run does not reduce risks/volatility.
It is all very depressing BS really......
I'm reading thru ur article Brendon.
I do have some questions with the use of affordability metrics.....???
Sure... house price / Income gives a rough idea about affordability .... BUT... that is all it does..
Without digging alot deeper ...it does not mean much...
Who is to say that it is not the medium income that is the problem.??? ( ie. too Low )
Who is to say that the forces of Globalization have turned Auckland into a "Global City"...??
https://www.numbeo.com/property-investment/rankings.jsp
If Auckland Council was truely serious about both affordability AND the economic vibrancy of the city.... it would have produced this report ..rather than u... but they didn't...
( I think their idea of economic vibrancy to to employ people overseas to"promote" Auckland "... and , of course, to pay lots of money to come up with slogans..!! )
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11406141
Auckland Council have a goal to get median income to house price ratio back to 5 I think by 2030. This measure is quite good because it is a measure that gives comparability between cities... In the recent Auckland local government elections -transport and housing was the two main issues -so Auckland Council is concerned about housing matters. But they also need to promote their city -so blunt reports like mine are unlikely to find favour.
But you are right we should look at lots of different measures of affordability. It should be concerning to everyone that the most affordable part of the new build market -apartments costs are rising so rapidly. Surely this is an indication some reforms on the supply side would help?
It was their ex Chief Economist that set this target about 18 months ago. With him gone, who in council is to lead this.
Based on their measures to date, there is no way they will meet that target by their own efforts.
Would anyone in council like to show us progress to date.
Auckland Council have a goal to get median income to house price ratio back to 5 I think by 2030.
I thinking they are just wanking themselves here...
Unless.... they think the answer is for every one to live in hong kong like shoe boxes...
They can just as easily say... by 2030 we have a goal to grow med. Auckland incomes by 100%.... but they know that we would simply see that as a piece of... "Fantasy Fiction"
Brendon.... I'm not quite sure if I agree with your statement.. but I do agree that rising building costs plays its part.
I tend to look at it in terms of Bob Jones' "Gap" idea. ( simply the forces of supply/demand)
That is... the gap between the value of New house vs the value of an existing house is what drives the level of development.... This price gap between new vs existing is what drives the supply....
New supply only starts coming on tap when the price of existing homes go up enough ...
( obviously there is a x% amount ( premium ) where new homes always sell for more than an existing home)
SO.... If homes in a small town are selling at way below replacement cost , then there will be very little new development.
If homes are selling for above replacement costs, then obviously , new development will become active.
( One must separate the land value component from the structure value )
This is all ,simply, the dynamics of supply/demand
AND.... obviously the value of a new house is determined by its cost of construction..
At a certain stage in the Boom cycle , :
My view is that it is price change itself, of existing homes ,that affects the psychology of speculators expectations.... ie. buyers and sellers become emotionally driven by the price change itself... ( irrational exuberance )... Price change, and crowd mentality , is the feedback loop that reinforces this
( I'd be surprised if they are even aware of building costs..?? )
SO... according to "Gap" theory..... if existing houses are selling well above replacement costs , then there SHOULD BE alot of new development happening...???
What makes it more complex is land values.... eg.. Auck. unitary Plan dramatically revalues the land component... etc,... etc.
Because of the "locational value" of land (ie.. finite locational supply ), land responds to the forces of supply and demand in its own way..
Things like Urban limits has a huge effect ... etc..etc
there u go... a long response , which is only my own view on things..
In terms of fixing the problems of high building costs..... well.. we seem stuck with the current ,entrenched building supply system....
Maybe Govt.. should hold off infrastructure spending , and do it in downturns...????
The Best time to have done this was when the Construction industry was in its deepest depression since the 1930s' Great depression ... back in 2009-2010... (We just don't have the leadership vision )
Those stats on numebo puts Auckland in perspective with other cities around the world. Anyway the main reason prices are going up in Auckland is due to the fact you can now put many more buildings on a section. My old next door neighbour has lived on the same section for 40 years. She is planning to move into a retirement village and is looking to build 8 residences on the site. Lucky Granny!
If those 8 new residences are sold for lower than median house prices for their neighbourhood/housing type/size -then Auckland would experience falling house prices -but if not....
What we need is the possibility of superabundant supply -if there was thousands and thousands of those sections which could be turned to 8 new residences affordably and if there was a way to build thousands and thousands of new affordable housing in greenfield areas without contributing to Auckland's infrastructure deficit. And if the ticket clippers, like the rorters in the construction material market were dealt to and if we had the same culture with other ticket clippers -in the private or public sector, then demand (from credit, or immigration or rising incomes or whatever) for housing would be converted to affordable housing being built -not to the expectation that house prices will rise....
The main problem in Auckland right now is there is a lack of tradesman, plasterboard etc. So the build rate is capped. As someone was moaning to me the other day the new immigration points system rise to 160pts precludes builders etc meeeting the standard. Also now Wellington is going to drain some tradesman from the available pool.
The build rate per capita in Auckland is still not that great. This shows how inefficient the building industry has become. It is not even building as many homes as the 2003 to 2005 building boom. The whinging and excuse making has come out really early in the building cycle.
Also more immigrants in total does not fix this problem as immigrants demand effect is greater than supply in the short term. What Auckland needs is to convert existing workers into builders and attract an increased mix of builders from the same number of immigrants. Usual mechanisms such as increasing wages should do this if other impediments in the market are eliminated.
If only the solution were that simple. Opening up an "abundant" supply of new housing land would simply make our current problems exponentially worse. The problem is that we have to pay for all this new infrastructure in the near term and immigrants are not paying for this. To make matters worse, Auckland Council debt is currently around $8b and projected to go to near enough to $30b within 10-15yrs, assuming Auckland pays rather than Central govt. Even under an optimistic scenario where interest rates only go to 5%, that equals $1.5b a year in interest alone...which equals the total current rates income for Auckland Council annually. Subsequently, Goff's pledge to cap rates increases to 2.5% annually would have been viewed as treason against the people in days gone by, but the lies and delusions just keep coming thick and fast...
US regulators forced fund managers to sell their bank debt to buy Government debt, which pushed up short term money market rates, and many expect the US Federal Reserve to hike next month.
The deadline to affect this transfer is past and yet Libor rates remain steep and elevated.
The one year NZD/USD currency forward discount pips imply a much higher NZ interest rate than is quoted domestically, if US Libor is the benchmark?.
I guess one sells spot and buys one year NZD/USD at a discount given this formula?
For example, if the dollar is cheaper in terms of yen in the forward market than stipulated by CIP, then anyone able to borrow dollars at prevailing cash market rates could profit by entering an FX swap – selling dollars for yen at the spot rate today and repurchasing them cheaply at the forward rate at a future date. Read more
https://www.theguardian.com/commentisfree/2016/nov/19/grief-five-stages…
Some people are not over Trump....for some quite good reasons. Reality may be some of them.
Worth a laugh...even if not your view point.
Brendon...
Did u get a chance to study Michael Rehms' article..???
He suggests Aucklands' housing shortage may be overstated. ( see table 1 in his article )
What do you think.??? ( I'm keen to hear your view )
http://www.interest.co.nz/opinion/84455/auckland-universitys-michael-re…
I am not convinced about credit being the sole reason for house price booms because there is such variability in prices from a city by city basis within a common credit zone.
WRT to Ireland -I think a lot of the new supply pre-GFC was housing estates being built in the wop-wops -isolated fens -not in economically desirable locations close to Dublin -due to planning restrictions for housing in that city....
Michael Rehm claims in his article that debt to income is the driver for house price rises. He says "This pattern is not only found in New Zealand – it is a global phenomenon."
But he only gives evidence from NZ and Ireland.
There is plenty of evidence of other cities where credit fuels building of affordable housing i.e. quantity increases but prices do not -there are many example cities in the US, Tokyo and Euro countries. The Euro countries had the same credit conditions as Ireland -cities in Germany built, but did not have Ireland's house price boom.
So there must be some local conditions -to do with elasticity of supply in the housing development/building industry.
My take is it's a case of excess credit fueled demand meets restricted supply, so there is a long lag between demand picking up and houses coming on stream. For a long time there is an apparent shortage until supply catches up. When supply eventually exceeds demand there would normally be a severe price fall, as we have seen with such things as coal, iron ore and oil. However, we have created a situation where the collapse in debt that this causes is so catastophic that we have to bail out the banking system instead. That is where the Gosplan like tendency of relying on Central Planners (in the form of Central Bankers, Civil Serpents and corporate CEOs) leads.
The ascent of the Trump and Brexit and the slow motion collapse of the EU are consequences of this over reliance on centralisation, financialisation and above all, bureaucratisation. It is the mistaken idea that "experts" exist who know how to run things. Better to break up the monstrous immortal corporations, especially the big banks, and adopt a system like the Swiss have of highly successful direct democracy. The big danger to our society has come from concentration of risk from large organisations, most especially large bureaucracy.
The smokescreen that the bureaucracy hides behind is the political process, but they are largely immune to reform, as Mr Obama discovered. Messrs. Trump and Obama have a lot more in common than is widely acknowledged, they both wanted to change things for the better (rather than just line their own pockets, and those of their mates, like both Bushes and both Clintons).
I have no problem with your argument Roger, "My take is it's a case of excess credit fueled demand meets restricted supply".
It is the people who deny that restricted supply is part of the problem, despite a massive volume of evidence who I think are naive, ignorant or a bit simple....
From your own link Brendon, correctly calling as the credit fuel as the horse, and the house building as the cart.
Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed.
Doesn't really matter at all if your credit bubble causes only 10,000 homes per year at a million each, or 20,000 per year at 500K, it is still a credit bubble. In this case it is linked to international money flows, and any solution must involve stemming those flows. But given that interest rates are the inverse the quantity of money, it is a tricky thing to control given the international nature of it.
Yet that’s just not the way unsound finance works. We’ve experienced a multi-decade Credit inflation of epic proportions. At this juncture, I would bet on consequences coming home to roost - rather than unending free money (to finance economic renaissance) as far as the eye can see. And, while we’re pondering the future, let’s hope for something other than “as exciting as the 1930s.”
http://creditbubblebulletin.blogspot.co.nz/2016/11/weekly-commentary-as…
If you want to talk about the 1930s, infrastructure, housing and escaping deflationary periods. Check this out this article "Escaping liquidity traps: Lessons from the UK’s 1930s escape." http://voxeu.org/article/escaping-liquidity-traps-lessons-uk-s-1930s-es…
Yes, the 1930s are indeed instructive. AEP and Ben Bernanke both think Takahashi Korekiyo was the man to copy, but they forget to mention that the venerable Korehiyo San was murdered in his bed when the time came to stop funding the Military Bureaucracy.
http://socialdemocracy21stcentury.blogspot.co.nz/2011/08/takahashi-kore…
To my mind the master was Hjalmar Schacht, the genius who saved the German currency and financed the rebuilding of Germany, giving them excellent worker housing and motorways in the 1930s (whereas the US only got them in the 1950s). Unfortunately, he thereby enabled Hitler and his Military Bureaucracy, and has therefore been airbrushed from history.
To this day Germany runs a massive export surplus based on the wisdom of his insights (and therefore bankrupted Spain, Portugal, Ireland, Italy, Greece and Cyprus with a form of vendor finance). In many ways competent bureaucrats are far, far more deadly than incompetent ones. (Would Germany in 1914 have been a dictatorship, sorry, absolute monarchy, without Bismarck?).
AJ.... Maybe u underestimate the power of Govts. and Central Banks... ??? ( the "come to roost" days may be some ways off, in arriving )
Ray Dalios' view is that the best analog period in history to compare to our current situation ...is the mid 1930s'.
I tend to agree with him..... yes.. Dalio is my guru.. : )
I think the credit bubble author has got it wrong , comparing today with the late 1920s'..
We were in that place back in 2008.... but not now..
In 2015 and early 2016, when CNY would fall and indicate these "dollar" issues tied to Japan JPY would rise. Since July, JPY began to steady right around 100 to the dollar that seemed to have increasingly tightened "dollars" in China. Throughout October and then so far in November, JPY falls and CNY gets hammered; good for Japan (presumably) and bad for China (and everyone else).
I don't know exactly what that is, but I suspect it is Japanese banks closing out their "dollar" positions via transactions with the BoJ or some other source. The problem with closing out of "dollar" funding markets, as opposed to raising the cost of, and charging higher premiums for, continuing a "dollar" relationship, is obvious. And it would have reverberating effects, as fewer Japanese "dollars" would overall raise the cost for everyone else absent an increase in "supply" from somewhere else - which the possible restart of the "rising dollar" would seem to preclude.
Chinese officials say that everything is fine and dandy, completely under control with the PBOC standing by just in case. That statement is actually perfectly compatible with what we find in China, just not in the way Chinese officials surely were hoping.
http://www.alhambrapartners.com/2016/11/18/history-repeats-and-repeats-…
I have to say... I generally find alhambrapartners articles difficult to understand...
My brain is not high powered... so I have a need to break things down , to understand, in "first principle" terms... ...and their articles are anything but that... ( hard work )
Interest rates bottomed in 1945, so your mid 30's comparison might have something in it. The end of a supercycle for sure, interest rates tell you where we are in the cycle. Perhaps with 30% of the worlds bonds in negative territory we are close. My view is the FED may raise, but not by much and not for very long. There is nothing I have seen anywhere that gives me reason to believe that the downward trend will be broken. Sure it can rise within the trend though.
Exactly, but much more deadly . Tragedy & Hope: A History of the World in Our Time
https://www.amazon.com/Tragedy-Hope-History-World-Time/dp/094500110X
A History of the World in Our Time by Carroll Quigley is the ultimate insider admission of a secret global elite that has impacted nearly every modern historical event. Learn how the Anglo-American banking elite were able to secretly establish and maintain their global power. This massive hardcover book of 1348 pages provides a detailed world history beginning with the industrial revolution and imperialism through two world wars, a global depression and the rise of communism
I think there are 42,000 kiwis living in precarious over crowded living conditions -garages, cars, camping grounds and couch surfing (from 2013 census). I think Auckland has a housing occupancy rate far higher than anywhere else in NZ. I think that for most of this government's administration that new arrivals to Auckland (immigrants mainly) divided by the new houses being built, gives a figure greater than this occupancy rate. Indicating 'over crowding' is not improving in Auckland. So I do not think there is a surplus of houses -I have no idea where this 1257 net surplus house figure comes from - to me it looks like BS. It also doesn't match the economic modelling for the Auckland Councils and the Unitary Plan Independent Hearing Panel and it doesn't match the government's modelling behind the National Policy Statement -Urban Development Capacity. But Roelof feel free to cherry pick evidence that suits you and ignore uncomfortable facts -it is a common tactic used by many.......
His 1257 figure comes from census information... it is simply the net figure surplus..of 1986 to 2013 .
Its' not about cherry picking ... its about wanting to understand the truth..
Thats why I ask you..... Census data seems pretty solid.?? Why is there such a disparity between this data and others' modelling..??
You are the one with the knowledge..... I was hoping u could tell me..??
I do know.....Future projections based on extrapolation.... is a poor way of forecasting ,
There is an extreme difference between this guys census data .... and the councils projections...???
What does Michael's surplus houses figure mean Roelof? Why did you not ask him? To me the overcrowding rate is more relevant as it seems obvious that if house prices and rents are too high then more and more people will get squeezed into the houses that they can afford and a increasing number will drop out of the formal market altogether.
How can there be 1200odd surplus houses if there are 40,000 + people not living in a proper home. So yes I think the figures are bogus. I am not exactly sure what Michael thinks he is referring to. But maybe these are houses temporarily empty because they are under repair, the owners are away on holiday or some other reason for the owners not to be occupying or renting the houses during the Census period.
bond crashes,just like property and sharemarket crashes happen regularly and yet few see them coming in time to bale out.we live in an area where the exclusive brethren used to own a lot of the businesses,they sold all of them in 2007 before the slump and the GFC.I see now they are selling their lovely big houses,lots of bedrooms and built to a high standard.
I wouldn't say bond crashes happen 'regularly', we have been in a 30 year bull run. Maybe that's coming to an end now. Of course that will be Trumps fault....
Bond crashes are far more serious than sharemarket crashes as the bond markets are many multiple times the size of sharemarkets.
Property market crashes only effect those who haven't built up significant equity (if my home dropped in value 100k, it just means the next home I move to will be accordingly cheaper - so am I in real terms worse off?). Drastic interest rate increases effect everyone, directly or indirectly. They remove significant amounts of disposable income as well as greatly reduce the amount of people who can raise finance to buy stuff or make investments. Therefore bond market crashes are much, much worse.
"...It means investors holding US Government debt and other bonds that are priced off this benchmark just lost more than US$1 trillion."
That's slightly misleading to common people on the street don't you think? They buy a bond at the coupon interest rate, which they agree to, and get paid that interest rate in full and all their principle back on maturity. Sure the bond price may fluctuate during its life, (depending on current interest rates that go up or down), just like any investment really, but in the end they get all their money back with interest payments as agreed. That's like saying if I make a term deposit and later interest rates rise then I just lost $$$, actually I didn't loose anything but the opportunity cost. Or if I take out a fixed mortgage at 5% then rates drop to 4%, then I lost $$$$.
The trillion dollar loss is notional.
Not to the tax payers underwriting the redemption and high coupon interest costs over a long time period.
US taxpayers underwrote the payment of 15% annual coupon payments on $billions of outstanding 30 year US government bonds issued up to 1982 while the market yield fell to 2.5% near the last redemption date in 2012. The ongoing transfer of wealth to bond traders like myself over this period was enormous and yet the tax paying citizens were locked in as you say until redemption. Professional traders skipped in and out of maturities to lock in capital gains funded by static future payments as yields tumbled. Furthermore, much needed capital was applied to this purpose instead of productive investment endeavours funding the taxable wages of those underwriting said coupon payments.
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