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Roger J Kerr says the time has come for more local corporate debt issues, which offer much better returns than bank term deposits
By Roger J Kerr
It is particularly instructive for future market interest rate direction that the US 10-year Treasury Bond yields have reduce no further than 2.60% on the "non-tapering" Fed decision a month ago and the US fiscal fiasco currently being played out.
Today the US bonds trade back up to 2.69% as the markets start to price in a compromise resolution of the budget/debt ceiling standoff.
Local borrowers who have been waiting for a full US debt crisis to develop to push bond yields lower to fix further debt at lower swap levels may be signing in the wind.
Borrowers who have missed all the opportunities to fix interest rates to date would have to be questioning their risk management disciplines or where the instructions/information is coming from not to fix.
Perversely, a resolution to the US fiscal problem should result in higher 10-year Treasury Bond yields as the markets return to focusing on the economic outlook and conclude that US economic growth and inflation will be increasing, thus unwinding of the monetary stimulus will be occurring in 2014.
The downward correction in US bond yields appears to be already over.
In the local debt market, prime borrowers have witnessed the massive investor demand ($800m) for the recent Westpac bank bonds and more latterly we have seen Christchurch International Airport (BBB) place $50m of eight-year bonds at swap +147 basis points (6.25%) and another BBB-rated airport Wellington Airport also coming to the market with an identical $75m eight-year offering.
It seems investors are happy to chase anything over 6% after years of a diet of 4% returns on bank deposits.
It is great to see the domestic bond market extending in duration out to eight years.
The corporate borrowers tapping the investor demand at very satisfactory pricing for a tenor that banks are generally not extending to.
I would expect to see more corporate borrowers arranging similar debt issues now that the window of opportunity is open to them.
The smaller investors buying these bonds are doing so as a hold to maturity and will not be perturbed at the marked-to-market revaluation values of the bonds going down as term interest rates increase further.
The larger institutional investors buying these bonds are big enough and ugly enough to look after their own interest rate risk inherent in their fixed interest portfolios.
Third quarter inflation numbers being released this Wednesday should not rock the boat in interest rate markets.
While current inflation is low, monetary policy and forward pricing in the interest rate markets is all about future inflation levels.
A stronger economy, rising house values and rising incomes (particularly in the dairying provinces) all add up to wholesalers and retailers not having to discount so much to get increases sales.
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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