By Kymberly Martin
The fact NZ swap and bond yields closed little changed belied a fairly active day in NZ markets.
Overnight, US 10-year yields traded a jolty path around 1.89% while German equivalents fell to new historic lows of 0.10%.
NZ swaps initially tried to fall following the previous night’s post-retail sales decline in US yields. However, the move did not get too far with some paying activity from the domestic sector.
There is continued mortgage paying at the short-end as borrowers take advantage of current attractive fixed rates.
RBNZ's Deputy Governor’s scheduled speech on the NZ housing market highlighted significant risk in NZ's overvalued housing market. He discussed a number of policy options to address the issue, which are outside of the RBNZ’s remit.
He also said, "nor can monetary policy be used currently to dampen housing demand, as CPI inflation is below the Reserve Bank's target range".
In other words, although the normal response to the housing problem might be to raise rates, at present it can’t. However, in our opinion, house price pressures would provide a good reason not to cut rates.
It was also a fairly active day in the NZGB market around the maturity of the NZGB 15 April 2015. But NZGBs failed to rally, as it appears much of the necessary buying of long-dated bonds had already been done.
The ECB made no change to its policy overnight, as expected. President Draghi expressed commitment to the Bank’s full QE programme that is tabled to run until September next year.
Although he saw “clear evidence that the monetary policy measures that we’ve put in place are effective”, he said he was surprised by talk of an early exit from the proposed programme.
German 10-year yields closed at new historic lows of 0.10%.
Today’s local focus will be the AU employment report. Ahead of this, the market is pricing around 60bps of further cuts from the RBA. Our NAB colleagues see a further RBA cut at the May meeting.
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He also said, "nor can monetary policy be used currently to dampen housing demand, as CPI inflation is below the Reserve Bank's target range".
The need to reinvent what constitutes inflation has long past. The specific introduction by the US Federal Reserve of policies designed to reduce term US Treasury and Mortgage securities yields ignited investors appetite for "RIsk -On" investment strategies that flowed into the global property market.
Globally, property generated total average returns of 9.9 per cent in 2014 thanks to rapid capital value appreciation, MSCI found — the best performance since 2007 and the fifth consecutive year of increasing returns.
The spiralling price of property assets in the world’s biggest investment markets was raising “increasing concerns over its sustainability”, said Peter Hobbs, research managing director at MSCI.
“Most global markets are at or close to historic low [yield] levels,” he said. The yield expresses rental revenue as a proportion of a property's value. As values rise, yields fall.
The main factor behind the pricing is “exceptionally low” bond yields, which made property much more appealing to investors in relative terms, Mr Hobbs said, citing “frenzied buying”. Read more
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