Higher and higher

Bonds / analysis

Wholesale swap rates get new energy to push on sharply higher, even on top of the recent sharp increases. This fire is now well ablaze

27th Oct 21, 4:50pm by David Chaston

New Zealand swap rates surged higher again on Wednesday. The drive up is not relenting.

This will have strong implications for fixed home loan interest rates - even though they have just moved higher already over the past week.

But Wednesday's wholesale jumps clearly mean more rises are on their way.

To put the rises in perspective, wholesale swap rates already had the increase priced in at the Reserve Bank Official Cash Rate increase on October 6. After that until the surprising high New Zealand Consumers Price Index number, the one year swap rose +13 basis points on the indication the RBNZ was committed to more hikes. The two year swap rose +25 bps, and the three years by a similar amount over those 12 days.

Then the surprise CPI result generated a sharp jump, which until today (another 9 days) caused the 1 year swap to rise a further +25 bps, the two year by +10 bps and the three year by +15 bps.

Now, today alone, the one year swap is up yet another +10 bps, the two year by +12 bps and the three year by yet another +14 bps.

Local market demand is being fueled by self-fulfilling forces as borrowers rush to fix at current levels. But now, the Aussie third quarter CPI data came in higher than expected, especially the core CPI. Further, giant grocery retailer Woolworths flagged unrelenting cost pressure coming through their system which will be passed on.

Let's face it, if the supermarket buyers can't avoid cost increases, no-one will have the power to resist. And this is just adding fuel to the fire of CPI and interest rate rise expectations.

The bottom line: brace yourself for more chunky fixed rate home loan rate increases, and soon.

(And term deposits rates will also follow up, perhaps with a lag.)

Daily swap rates

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Source: NZFMA

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78 Comments

by fortunr | 27th Oct 21, 5:00pm 1635307258

bring it on! look at the swap rates curves, very nicely upwards and steepening. Well overdue and this is just the beginning.

by Audaxes | 27th Oct 21, 5:59pm 1635310785

The 10 year rate is 2.7%

The 2 year rate is 2.17%

Can we really call that steep on moderate outright yield quotes?

The CPI is 4.9%, putting real rates in negative territory- hardly a harbinger of exceptional monetary based inflation.

The US IR 2yr vs 10yr swap spread is currently 102 bps.

by AKLCrusader | 28th Oct 21, 8:21am 1635362510

Wait till the next CPI read, expect more than 5% annualised........ companies are definitely committed to cost recovery for goods now, at lest those who are even able to get goods to market at the moment.

by Justa comment | 27th Oct 21, 7:20pm 1635315601

We are still a long way from a normal OCR of at least 2. But yes, its time to start moving back to reality, money doesnt grow on trees, and it costs to borrow it.

by Hardly | 27th Oct 21, 5:01pm 1635307276

Nature is healing itself.

by Foxglove. | 27th Oct 21, 6:45pm 1635313559

Who kicked the wasp’s nest!

by Smashed_Avo | 27th Oct 21, 5:07pm 1635307667

Hi David, you say aussie cpi came in higher than expected here, but in the daily update you say it dipped more than anticipated. Are these different measures or are you comparing different expectations? Thanks

by David Chaston | 27th Oct 21, 5:22pm 1635308549

Ah, yes. Good point.

The headline CPI dipped true, but the RBA trimmed mean rate was higher. It is this technical inflation rate that the market is focused on and it was higher than anticipated.

by Notgreedykiwi | 27th Oct 21, 5:10pm 1635307854

So did everyone who paid multiple of millions on buying their new houses think that they will be paying sub 2% interest for next 30 years? Who's deluded?

by ikimpaul | 27th Oct 21, 5:21pm 1635308504

I think you will find that a number of commentators on this website- STILL believe they will be paying sub 2% interest for the next 30 years.

Everytime you mention interest rates will rise and are rising - they deny all possibility of that occurring.

by Notgreedykiwi | 27th Oct 21, 5:30pm 1635309004

True. I have a very simple question to all those who think like that. How do they think money is made? What is productivity?

Selling same house again and again at a higher price every year is not productivity and it's not how money is generated.

Hard work makes money and there cannot be short cuts in hard work. If you short cut that, you pay for it tomorrow one way or the other.

by northman46 | 27th Oct 21, 5:31pm 1635309111

Interest commenters I find are a bit more rational about it. Stuff comments, however, are not. They seem to think they are the victim that RBNZ (or the banks) have targeted. One chap, who was unable to find work, was outraged that this could bankrupt him. He seemed to think 30% plus gains were normal now, as we're ultra low rates, and that's how he would make a living. And these rising rates were taking away his chance to make a living. The entitlement is astounding.

by HouseMouse | 27th Oct 21, 8:26pm 1635319619

I'm not sure if I am one of the commentators you are referring to. I certainly don't expect that interest rates will be sub 2% for the next 30 years, however!

However, I am much more bearish on interest rates than most here, that's for sure. The reason is not cognitive dissonance, or vested interest in maintaining low interest rates (I could easily handle a mortgage rate of 4%+). And I would actually like to see this stupid and destructive housing bubble crashed.

Rather, it's a view informed by recent RBNZ and government behaviour, which suggests they will do everything they can to avoid bursting said house bubble.

So I put this to you and others who think the OCR will be raised aggressively in the coming year - why do you think this will be done, when it would crash the housing market and the economy, and flies in the face of the RBNZ's recent practice? And remembering that their mandate includes financial stability and employment.

I just can't see it happening, for those reasons.

But keen to hear responses to my opinion, and why I might be wrong.

by brisket | 28th Oct 21, 8:18am 1635362336

I thought the same, until recently. But I didn’t see this level of global inflation coming. Energy prices, in particular, could force the RB’s hand. Otherwise they would just maintain low rates forever.

by HouseMouse | 28th Oct 21, 9:46am 1635367590

Thanks Brisket. So where do you see the OCR this time next year?

by MLSmith1 | 28th Oct 21, 10:38am 1635370717

No matter what RBNZ does (nothing, increase, decrease) pain will ensue. The size of the matter is not something we can control.

What I'm curious about, is when the howls of inequity and such increase, how will they spin it?!

by Averageman | 27th Oct 21, 5:29pm 1635308998

Yeah. Was talking to a young agent yesterday who had no idea what the interest rate average was over the long term in NZ, or the levels that central banking has gone to to defy financial gravity. No idea or financial literacy whatsoever.

Bring

On.

by HouseMouse | 27th Oct 21, 8:29pm 1635319750

It's the same with every generation.

There's cocky, invincible types in every generation. Then they learn the hard way, through experience.

by Independent_Observer | 27th Oct 21, 8:33pm 1635320011

Most seem to be in the 50-60 year age bracket in NZ with respect to property because they’ve never experienced market pain. Pain teaches humility. The younger ones are more gullible than cocky or arrogant like those who have never been burnt.

by HouseMouse | 27th Oct 21, 8:37pm 1635320224

I guess the young ones in their 20s are the kids of those boomers!

by VTHO | 27th Oct 21, 6:01pm 1635310882

Lol... *grabs popcorn*.

by nktokyo | 27th Oct 21, 6:02pm 1635310952

All locked in back at the end of summer for 5 years.

It's not your job to predict the weather, it's your job to build the ark.

by CWBW | 27th Oct 21, 6:27pm 1635312427

On a positive side, higher inflation forces mortgage holders to pay down their loan faster and hence generating a higher gross return for the property investment at the end of the loan tenure.

It's still a win for everyone with a healthy cash flow.

by bw | 27th Oct 21, 6:41pm 1635313293

Actually, higher inflation forces mortgage holders, and anyone else, to spend more of their Disposable Income on necessities. It doesn't matter if they have a healthy cashflow or not.

The hope is that Wage Rises eventuate to 'pay down the debt' faster.

They had better. Because if they don't, we are in more trouble than we want to contemplate.

by fender bender | 27th Oct 21, 7:16pm 1635315361

“The hope is that Wage Rises eventuate to 'pay down the debt' faster.”

Umm, wages go up….

The cost of “stuff” goes up to finance the increase in wages.

But we still have to pay down debt even though our wages are being sucked up by higher costing “stuff”.

Ok, new plan…. I’m gunna stop buying “stuff” and just pay my debt down….

How does that play out…

Maybe rely on renters to buy "stuff"?

by bw | 27th Oct 21, 7:35pm 1635316506

Precisely. Any Wage Rises that MAY come are likely to get sucked up by the Cost of Living - in its most basic of senses.

Snapper, today, cost me $49-50 per kilo. Perhaps 18 months ago, I paid $32. So. Do fish-eater buy less fish, and use any wage rise to 'pay off the mortgage', or do they pay $49-50 a kilo? My suggestion is that they will probably drop to Terakihi and still pay no more than the minimum off the mortgage.

Higher mortgage rates are unlikely to encourage people to pay off debt any faster than they do today. In fact what may happen is.....they extend the term of their debt to allow them to 'pay less' each week to meet the rising costs they have to pay.

by muzled | 27th Oct 21, 8:24pm 1635319488

If they'd eaten enough snapper they'd have bought Terakihi in the first place as it's a superior product. :)

by HouseMouse | 27th Oct 21, 8:30pm 1635319840

'Tarakihi'

And pronounced TARA KEEHEE

not TERA KEE

by HW2 | 27th Oct 21, 8:49pm 1635320989

"Do fish-eater buy less fish, and use any wage rise to 'pay off the mortgage', or do they pay $49-50 a kilo? "

No they buy themselves a fish harvester and get it for free

by youngdumbandbroke | 27th Oct 21, 9:00pm 1635321628

Fish harvester is not free lol

by Theoracle | 27th Oct 21, 10:19pm 1635326349

Disagree. Not much anything in the world more delicious than fresh snaps fried in butter.

by JimboJones | 27th Oct 21, 7:02pm 1635314528

I’m not convinced there will be a win for property investors from higher interest rates. They might feel infallible from years of decreasing rates and corresponding rising prices, but that feeling is not reality

by rjn1 | 27th Oct 21, 6:31pm 1635312682

Perhaps the market is still functioning beneath the collective psychosis of the crowd? Expect auction sales rates to grind to a halt as the herd gets wind. Smart vendors will meet the market at the start of the retreat. I think we're about to see just how quickly greed transitions to fear.

by JimboJones | 27th Oct 21, 7:15pm 1635315359

I’m not sure they are smart enough to have fear. Property is a sure bet and all.

by brisket | 27th Oct 21, 7:50pm 1635317412

Agreed. If rates went to 10% overnight there would still be buyers. The desperation is palpable.

by rjn1 | 27th Oct 21, 9:55pm 1635324913

There will always be buyers, but it’s the market price that I’m interested in. There’s no way that stays at current levels as rates skyrocket. And I’m not talking about a reduction in the rate of price growth, which seems to be the limit in the minds of most economists, still licking the wounds of forecast embarrassment.

by brisket | 28th Oct 21, 8:26am 1635362788

I would agree, except I don’t expect sanity any more. Kiwi investors will spray money from every orifice in the direction of real estate, even if real returns are deeply negative and interest rates at 30%. It’s religious now. They won’t stop short of bankruptcy. In fact, I expect an acceleration in inflows and prices that will retrospectively justify current stupid valuations. It’s like Tesla.

by jeremyr | 27th Oct 21, 9:43pm 1635324186

Most property investors are investors in property cos their neighbours, or mates or family are. There are some professionals, obviously, with a focus on long term value add, that positively gear their properties. But they are few and far between.

The reason that people invest in property in NZ is primarily that we are more or less un-educated and property is seen as 'the' investment by default as no one understands or can be bothered understanding anything else.

This creates an artificial market that is driving up prices and hurting society purely as a result of our combined ignorance.

I do have a small mortgage, maybe 300k, and locked it in for five years last week at 3.8% for five years. Happy with the decision.

Looks like it will get a big ugly from here on in, with five-year rates already at 5.34%. Wouldn't be surprised to see them in the 7-10% range in the next few years. After all, that is what the banks based their stress tests on. Why would they do it if they think it would never happen ?

by Ahuhyeah | 27th Oct 21, 9:55pm 1635324936

$300k is considered a small mortgage. I must be getting old.

by HouseMouse | 27th Oct 21, 9:58pm 1635325113

Very small by 2021 standards.

by Ahuhyeah | 28th Oct 21, 6:58am 1635357527

Yep. True that.

by JJS | 28th Oct 21, 8:51am 1635364304

Yep - I have friends in their 30's who have spent $3m in Grey Lynn (needs work too) with $1m down. This behaviour is not uncommon across Auckland. They all see it as a leveraged investment that they can't lose on.

by wewillsee | 28th Oct 21, 8:57am 1635364659

$1m down in 30's, would be probably less that 0.01% of the population.

by JJS | 28th Oct 21, 10:29am 1635370172

Not out of the ordinary if you bought your first house ten years ago for $500k - which is the problem, people think the growth in vales mean they can get rich by making only the minimum mortgage payment. Obviously worked in the past, but risky business going forward

by CrispyKahawai | 28th Oct 21, 9:59am 1635368348

Mine is $1.27million. Welcome to a doer-upper in central Auckland.

by Nzdan | 28th Oct 21, 11:18am 1635373113

$150k here, FHB in 2017.

by Cobolt24 | 27th Oct 21, 9:55pm 1635324939

I doubt fear although, I think we're at the end of a massive bull run

by JimboJones | 27th Oct 21, 7:15pm 1635315301

So will Orr back off from OCR hikes because market rates are naturally doing his job?

by Justa comment | 27th Oct 21, 7:22pm 1635315771

by Brutus Iscariot | 27th Oct 21, 7:32pm 1635316324

Quite interesting. We're just basing off their projected track, but the RBNZ have been very quiet. Apart from their October announcement, there have been precious few of the usual speaking engagements and other media jawboning.

With current data, they basically have to follow through on what they've said which is get to 2% in short order. The swaps market has done a lot of the tightening for them - but the curve is super flat from about 2-3 years out. There's a lot of debt out there that prices off mid term swap. The question is whether a 2% OCR is going to be enough? There is a chance markets overshoot and 5 year swaps head into the 4 or 5% range. Then grab the popcorn...

by HouseMouse | 27th Oct 21, 8:32pm 1635319946

I think he will moderate the increases, although I think he would do that anyway for the reasons I state higher up the page.

by Squishy | 27th Oct 21, 7:56pm 1635317788

Many people believe that the Reserve Banks quarter percent OCR rises are too slow to have any short or medium term impact on CPI.

by HouseMouse | 27th Oct 21, 8:35pm 1635320104

I don't agree with that view. It sends a signal, especially if the RBNZ's messaging signals further increases, which the market reacts to.

I personally think beyond house prices, raising the OCR won't have much impact on inflation anyway.

But bloody heck, saw 91 petrol at $2.70 a litre today in Auckland...glad I don't need to drive much at present.

by Belle | 27th Oct 21, 7:58pm 1635317898

Well I am desperately hoping interest rates rise high enough quick enough, to detonate this government.

by Nifty1 | 27th Oct 21, 8:12pm 1635318757

Why aren't the banks borrowing through RBNZ FLP? Isn't this available until 2022?

by rjn1 | 27th Oct 21, 10:01pm 1635325295

Then what? Go to market to fund their loan book at the going the rate? A bank using FLP to fund mortgage lending is like a home owner floating their loan - not a great idea at present I’d have thought.

by Neil21 | 27th Oct 21, 8:23pm 1635319425

I suggest watching / reading the man who invented Quantatative Easing - Richard Werner.

He also wrote "Princes of the Yen".

Once we understand money and central banks, we have an idea about where we may be headed.

by AJ123 | 27th Oct 21, 9:09pm 1635322154

Don't know about the bigger picture but day to day things prices are getting higher and higher.

Also this is happening for the last few months now and Govt stance is still the same, this inflation is transitory.

Can someone tell me, transitory means for how long?

by Pa1nter | 27th Oct 21, 9:11pm 1635322294

How long to sort out the global supply chain and for covid to stabilise? Probably another 18-24 months.

by AJ123 | 27th Oct 21, 9:38pm 1635323887

Then it's not transitory.

by HouseMouse | 27th Oct 21, 10:18pm 1635326298

I would call that transitory.

by Pa1nter | 27th Oct 21, 10:18pm 1635326300

You asked how long a transitory period can be, how long do you think that is? We're only part way into a scenario unfolding and we think it can somehow be controlled by our reserve bank and government, the only thing that'll curb it is time.

by AJ123 | 28th Oct 21, 9:34am 1635366860

If it stay for that long in that case it will become new norm & not easy to revert

by Pa1nter | 27th Oct 21, 9:10pm 1635322236

It's amazing how many remarks are heralding this as the consequence of an inept RBNZ and money printing, and almost no one recognising this as more as the consequence of covid-19 on global trade and economies. The RBNZ isn't making gas $2.70 and effecting our balance of trade.

Spose it's sexier to do some hand wringing.

Only a hop skip and a jump away from talking about precious metals.

by HouseMouse | 27th Oct 21, 9:19pm 1635322772

Agree.

And raising the OCR will have limited impact.

by streetwise | 27th Oct 21, 9:26pm 1635323199

Here comes another Weimar Republic.

The recommended cure for an inflationary super-event is a war but only if you are a country that manufactures armaments.

Looking around there are not many large NZ-owned manufacturers remaining to convert into armament manufacturers. Perhaps Hynds Pipes could manufacture mobile missile launchers. Pacific steel could perhaps convert to making shrapnel for artillery shells. But that's about it.

Anybody know of any others?

by Cobolt24 | 27th Oct 21, 9:58pm 1635325117

Tiwai making aluminium for aircraft

by Pa1nter | 27th Oct 21, 10:20pm 1635326439

I think if it came down to us manufacturing war machines, a lack of suitable companies is the least of our problems.

by HW2 | 28th Oct 21, 5:17am 1635351464

The man who ripped off Humes Pipes, yeah nah

by SimonRo | 28th Oct 21, 8:24am 1635362659

If there was a war, the undeniable strength of New Zealand would be... buying up weapons from overseas and selling them to each other at higher and higher prices.

by AKLCrusader | 28th Oct 21, 8:20am 1635362420

Why were observers and economists so surprised with the CPI result?

The only surprise to me was that it was so low!

by Clementé | 28th Oct 21, 9:41am 1635367269

Yup, it screams to me as it was instructed as "make sure it reads as south of 5%"

by HouseMouse | 28th Oct 21, 9:45am 1635367530

Very worrying if that is the case

by MortgageBelt | 28th Oct 21, 9:56am 1635368166

Floating mortgages may become more popular as the margin between fixed rates and floating reduces.

And who knows: next year the OCR may need to be dropped for an emergency/s.

by napierboy | 28th Oct 21, 11:13am 1635372823

I don't worry at all about the property investors who have loaded up the debt to buy more and more houses. I worry about the first home buyers who are starting out, taking out huge mortgages just to get into the housing market. Those people will really suffer when interest rates pick up, because they haven't had the time to pay off significant amounts of principle.

On the other hand, the corresponding fall in house prices should make property more affordable for new FHBs, but I feel like those properties will just be swept up by investors with low debt taking advantage of a falling market.

by HouseMouse | 28th Oct 21, 12:38pm 1635377898

Great point

by chebbo | 28th Oct 21, 3:33pm 1635388397

Aussie 2y yields skyrocketing this afternoon after the RBA refuses to buy them. I get the feeling this fire is about to become an inferno.

by Wrong John | 28th Oct 21, 4:51pm 1635393116

We went through the share market crash in Auckland in 87 & through to 91 in the end. Four long years the value of our property was below what we paid for it. We sat. We prayed. In 95 we sold for a 20% paper profit. F.... it was tough. I was diagnosed with depression & put on the pills. I wouldn't recommend that to anyone.

On that basis, I think the RB will be trying to keep things as low as they can go. Will global inflation ruin the party? Reality always sucks.