Roger J Kerr sees no scenario where interest rates move lower or even stay stable; they are going up whatever way you look, he says

 By Roger J Kerr

Borrowers who have been looking for opportunities to fix their interest rates over recent months have now seen a downward correction in interest rates at both ends of the yield curve.

Long-term wholesale swap interest rates have come back 25 basis points from the highs of early September as US 10-year Treasury Bond yields have moved down 50 basis points to 2.50% from 3.00%.

Our rates have only followed 50% of the US move down due to lower demand levels from global fixed interest portfolio managers to buy NZ Government Bonds and the fact that many corporate borrowers have belatedly been paying fixed rate in the swaps market.

At the shorter end of the yield curve it is again US economic developments (fiscal and monetary events) that have forced a weakening of the US dollar and Governor Wheeler musing that 2014 interest rate increases may be delayed due to NZ inflation tracking lower than forecast due to the weaker USD currency value.

Three year swap rates are down 20 basis points from 4.0% in early September to 3.8% today. I do not see the USD currency weakness lasting too long (already the Kiwi dollar has reversed sharply from 0.8500 to 0.8300 over the last three trading days) and when the NZD/USD rate returns to 0.8000 the three year swap rates will be reversing back up again.

So it is a window of opportunity for borrowers to top-up fixed rate hedging in the tenors where they do not currently have an appropriate spread of interest rate re-pricing maturities.

Current moneymarket forward pricing of short-term interest rates is not of line with current exchange rate levels and the strong economic outlook.

However, as the NZD/USD depreciates further on a USD recovery expect to see two and three swap interest rates move back up.

On the wider economic front, the Government and RBNZ have both pre-conditioned all and sundry to expect rising interest rates in 2014.

Provided the NZD/USD exchange rate oscillates around 0.8000 (as I expect) those interest rates increases will be orderly and gradual and thus not adversely impacting on the projected 4% GDP growth next year.

Should the exchange rate fall away to the low 0.7000’s due to a much more pronounced resurgence in the USD on global FX markets, the resultant interest rate increases in NZ would be earlier, larger and more rapid.

Such a scenario would adversely impact on the domestic economy as the housing market optimism is dealt a body blow with sharp increases in mortgage lending rates.

Whatever currency scenario you see playing out, there is no scenario of interest rates moving lower or even staying stable. 

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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