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Roger J Kerr says interest rate risks have shifted from the short-end to the long-end of the yield curve; rates will rise as the geopolitical risks recede

Posted in Opinion

 By Roger J Kerr

Local economic data has been a real mixed bag of late; the housing market has cooled as expected under the weight of higher mortgage interest rates and the plummet in dairy prices has slammed rural cheque books shut.

Employment growth numbers last week for the June quarter were not as strong as prior forecasts and fewer people are looking for a job (too cold?).

RBNZ and bank economists are right to be more circumspect on the economic outlook.

The Christchurch rebuild underpins the impetus in the economy, which makes you think that we would not be looking that flash without that one-off and unique boost.

As identified in this column several months ago, the two risks to the rock star economy were lower dairy prices and higher mortgage rates.

Both risks have eventuated; therefore the current pause from the RBNZ is entirely appropriate.

Thus short-term interest rates are across the page for the next six to nine months and then the extent of increases from there will be highly dependent upon where the NZ dollar currency value is at that time.

While the risk of immediate adverse movements up in market interest rates is lower for short-term interest rates, borrowers are still very much at risk of long-term interest rates increasing substantially over coming months.

Global geo-political events (Iraq, Ukraine and Gaza) have driven US 10-year Treasury bond yields lower to 2.42% due to safe-haven investor buying, despite US economic data continuing to print on the stronger side.

The lower US bond yields are completely out of whack with increasing GDP growth, inflation rising above 2% and the Federal Reserve not too far away from signalling to the market how and when they will start to increase short-term interest rates.

It is hard to see our 10-year swap rates remaining at 4.7% for too long given the increased risks of increasing US bond yields.

There are no immediate resolutions for the geo-political issues in Iraq, Ukraine and Gaza, however how much more can the crises intensify to scare investors even further?

Eventually the economic fundamental factors have to re-emerge and they all suggest sharply higher bond yields over coming months.


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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

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unless endless printing and

unless endless printing and easeing have created a new norm. The fact that five years on we still hear rates will rise SOON yet they continue to fall, Maybe you  should look at the alternatives for us, could the dynamic have changed? 

Totally agree. I suppose its

Totally agree.
I suppose its like a broken clock, right 2 times a day.
"could the dynamic have changed" of course it has.

geopolitical risks

geopolitical risks receed?
oh boy....

Roger , if CPI annualised

Roger , if CPI annualised drops to 1.0 percent or less  in the third quarter what will Graham Wheeler do?

It goes something like

Thanks Andrew j

Thanks Andrew j

I've had a bad day. It

I've had a bad day. It started once I realised that the so called 53,000 acre donation to the QEII trust used to justify foreign ownwership, was actually crown land.  I amazed that we just believe what we are told, where's the Journalism?

Down to 1% would be rather

Down to 1% would be rather extreme and unexpected? IMHO. Lets be a bit more realistic, say if it  even drops a small amount say, 0.1% or even 0.2%?
At that point I cant see how a rise in the OCR could be honestly justified.  Dogmatic, yeah sure.
Anything above a drop of 0.2% would surely demand a substantial cut in the OCR?

We are currently  about mid

We are currently  about mid quarter and obviously not all data is available.. The biggest driver of CPI over the past year was the 0.9% rise in the corresponding third quarter, which along with the usual spike in seasonal vegetables was primarily a result of  a falling NZD and rising crude prices. Even though we have had an additional three cents added by way of duty , pump prices are fairly stable and  could weigh on the transport sector. Although the rental numbers are but one of three months data , the possibility is that this group could subtract from the CPI weighting .1.0 percent annualised  is possible ( about 0.3  for the quarter), but then again our economists have been bleating on about potential inflationary pressures.

The duty is a one off so

The duty is a one off so should like the GST hike be looked through.
Petrol is or should be down, crude has come off its high, at least for now.
If we see 1% I would expect a sharp intake of breadth from our RB.

"Eventually the economic

"Eventually the economic fundamental factors have to re-emerge and they all suggest"
rinse and repeat for how many years? 6 now?
What happens when any nascent recovery shoves up the price of crude?
Bearing in mind its been dropping recently, what should that be saying?
plenty of spare oil?
more supply?
or lack of demand?