By Roger J Kerr
The US bond market panic-attack which sent 10-year Treasury yields plummeting to lows of 1.86% at one point seems to have abated.
Yet again, it was not economic news that caused these almost unprecedented movements in US long-term interest rates, newswire headlines from the Ebola virus scare causing the panic.
The events of last week are a timely reminder of just how much on edge global investors and traders really are as they grapple with the implications of geo-political developments and Europe heading back into recession.
The buying and subsequent selling of bonds not having a lot to do with US economic growth, jobs and inflation which in the end should always determine the direction and level of 10-year Treasury Bond yields.
US bond yields have returned to 2.20%, lifting our 10-year swap rates to 4.45% from lows of 4.33% last Thursday.
Economically speaking, nothing has changed therefore this latest bond market dive in yields has to be viewed as total “irrational exuberance” that will automatically self-correct.
If any corporate borrower is not at the maximum of their hedging limits for long-term swaps they have a golden opportunity right now to get there.
I do not expect any great market reaction to this Thursday’s inflation data, despite the quarterly increase of 0.50% being well below RBNZ official forecasts.
The annual rate dropping to 1.2% should not be taken as read that we do not have inflation risks going forward in the NZ economy.
Increasing construction prices, lower NZ dollar value on imported consumer goods and higher capacity utilisation trends all suggest that the markets should not get too complacent about inflation risks in 2015.
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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
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