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Roger J Kerr warns that the rush to fix 'which always comes' as homeowners chase low rates, will unbalance the swap market and will raise rates across the curve. Your view?
By Roger J Kerr
The two risks of increasing interest rates that I have highlighted over the last several weeks, namely retail mortgage fixing and US 10-year Treasury Bond yields increasing are still very much to the fore.
Stronger US economic data, reduced US Fed consensus around continuing monetary stimulus and the absence of financial/investment market blow-ups in Europe has been behind the upward movements in USD long-term interest rates (US 10-year Treasury Bond yields now up to 2.00% from 1.60% before Xmas).
Comments from RBNZ Governor Wheeler at this Thursday’s OCR review are unlikely to be any different than previous RBNZ statements on the economy.
The OCR cannot be lifted unless the exchange rate depreciates substantially, which in turn causes inflation/growth risks to be elevated.
It is still hard to see what could occur to drive the NZ dollar currency value down on its own accord.
The “biological scare” with Fonterra’s milk contamination report last week hardly dented the Kiwi dollar.
It will take a stronger US dollar on global forex markets to cause any NZD weakness below 0.8000.
The US Fed’s FOMC meeting this week may shed more light on how far away increases in US short-term interest rates might be. The USD currency should strengthen well ahead of the eventual withdrawal of monetary stimulus and interest rate increases in the US sometime in 2014.
The Governor may well take the OCR review opportunity to remind all and sundry that the RBNZ now has other tools to manage inflation than just ramping up interest rates.
The macro-prudential measures of funding, LVR and capital ratios on the banks are either available or close to being available.
However, retail mortgage borrowers are not concerned with that, they always take the lowest available rate going no matter what the outlook for interest rates.
Right now the banks are offering two-year fixed rates at 5.25% to 5.45% against the 5.65% to 5.75% costs of variable rate mortgages.
The rush to fix may have only just started; however as we have seen in the past the stampede always comes and the banks are forced to swamp the wholesale swaps market with the one-sided “fixed paying” demand.
The net result is a gap upwards in two year swap interest rates that pulls other long term swap yields upwards.
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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