Investors holding $525 mln worth of bonds, paying more than 8% on average and due to mature in July, must be scratching their heads

Investors holding $525 mln worth of bonds, paying more than 8% on average and due to mature in July, must be scratching their heads

By Craig Simpson

With no new corporate bond issues on the immediate horizon, investors currently holding ASB, Heartland Bank, Tauranga City Council and Fidelity Capital Guaranteed bonds, all with current coupons of over 8% must be starting to scratch their heads wondering how they are going to reinvest their cash and maintain their current cash-flow.

The good news is that interest rates have increased sharply in the past two weeks meaning the potential hit for investors will not be as bad as it could have been.

The bad news however, interest rates are not back at 2007/2008 levels when some of these bonds were originally issued.

The current gap between what investors were getting and what they are likely to receive in one month's time is in the region of 3% to 4%.

For those investors needing both security and income they will be left with some tough decisions. As I see it the choice will either be do I sacrifice credit quality and risk losing capital, or do I accept a lower level of income but maintain a high degree of capital security?.

With another $525 mln worth of capital looking for a new home in July and investors all seeking to optimise their investment opportunities, you can expect a short supply of quality bonds which are offering above market returns.

Current interest rates

Interest rates have been on the rise as the level of uncertainty in global markets has increased. The primary drivers have been the US Fed announcement indicating it may taper back its quantitative easing stimulus programme, and fears around China's slowing economic growth and possible liquidity crisis.

Below are a some of the current alternative scenarios and possible yields. These scenarios are not to be construed as advice in any way shape or form and are by no means the only alternatives available. The return expectations are indicative only and subject to change daily. For the latest bond pricing see our daily fixed income indicative pricing here.

  • Government stock or Local Authority bonds which are generally considered the safest (but not risk free) fixed income investment offer approximately 3% to 5% depending on the investment and term to maturity.
  • Investors seeking a high degree of security and certainty around their cash flow but wanting a return above government stock are probably going to be attracted to a bank deposit. Current deposits yield between 4% and 4.5% depending on the term and the institution you deposit your money with.
  • Venturing further afield, corporate bonds with a reasonably high credit rating (AA- for example) may yield only marginally higher than a bank deposit (approx 4.3% to 5%). The advantage to a bond over a term deposit is you can trade it on the market but you also run the risk of the capital value falling if interest rates rise.
  • Investors seeking a lower level of capital security can step down the credit quality ladder and invest in BBB+ to BBB- or even un-rated securities. There is a premium over higher rated securities but realistically investors could expect to earn somewhere in the vicinity of 5% to  6% p.a from a 5-year bond depending on credit quality.
  • Some of the shares listed on the NZ stock exchange are yielding upwards of 8%. The dividend is not guaranteed and will change with the fortunes of the company. There is also a high degree of capital volatility which traditional fixed income investors may not be used to or willing to accept.

There is plenty for investors with funds to invest to think about. 

Any investor who would like advice on the options available to them and those best suited to their personal situation and investment objectives you should contact an Authorised Financial Adviser (AFA). A list of AFA's can be found here.

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If that half billion ends up invested in the mainstream banks will that mean lower mortgage rates?

Under Basel III the banks will be needing to hold more capital especially if they are taking a hit on their fixed income portfolios as mentioned in David C's 90@9 this morning

The question, as I noted yesterday, is how big is the hit? - the bell is certainly tolling for all of us- it's time to initiate damage control. Capital needs protectiion from the abuses of those who know little of it's value and the insurmountable task of recovery once it's extinguished.
The little discussed JGB losses set against Japanese Banks' Tier 1 capital was the initial cause of the carry trade punch bowl being removed from the A/Cs of the globe's professional IG and HY bond speculators. The rest is just further unravelling as each margin call is imposed. More graphic evidence

Get real Kimy - read this article by Gareth and then Stuff's follow up written by Tim Hunter
The deafening silence from the RBNZ demands urgent political attention.

You also omit the fact that 74% of that debt is against residential property (when I last looked) and I can't see how you see housing as an asset, it doesn't produce any income for New Zealand. There is a further 8% of debt in personal loans. So we have 82% of our debt, and our money supply for that matter, that is totally non productive. How exactly do you propose that the interest is paid on all that debt Kimy when it doen't produce any income. Your property game is a ponzi scheme mate and it could fall over at any time.

"With propertty, everyone has the equal opportunity to make money," surely you are not that stupid Kimy?
So are you saying that with a ponzi scheme it needs exponential growth at the bottom to supply the top with income, to keep the scheme from tipping over.
I notice you ignore the figures I put up, which come from the same source as yours. How is the interest on all that debt going to be paid on housing debt when it doesn't produce an income.

Kimy - that's hopeless. He's right, you're wrong, and the reason presumably, is that you're in up to your eyeballs in said ponzi? Is the reason you appear here arguing interest rates down, that if they notch up any you're toast?
By your definition, 'everyone has an equal opportunity to make money'. That's clearly bollocks. Every transaction needs someone to up the ante, and eventually there is nobody left - the lever extending the lever balanced on the domino can't extend any more. Ask the young reporter on the other thread about her 'equal opportunity'.
What most folk do, is indulge in false accounting. They think of 'owning', when 80% of it is owned by a bank, as is a near-endless percentage-suck. Folk fool themselves - which is why we have ponzis, bubbles, corrections, call them what you will.

Careful Kimy, I was going to call the comment about everyone being able to make money in housing as gobsmackingly stupid, but I softened it a little in case you just made an oversight. But is really is that bad my friend.
Still looking forward to your answer on how the interest on our housing debt gets paid. That also relates to all New Zealand currecy, which is all debt. So all 82% of New Zealand money(M3) is debt (E3 if I recall correctly)against a an asset that doesn't produce any income to pay the interest, let alone the capital. All facts readily available at the RBNZ you reference at the top of the thread.

Kimy you come on here and spam the place everyday with your property drivel but you can't answer a simply question like how a loan should be paid if it is to purchase a non productive asset. I has become quite clear that despite your attempts to appear like you know something that you don't have a clue, I certainly cringe when you argue with an expert in international finance like Stephen Hulme and a few other clever types around here that have tried to guide you, I think it is time for you to step up and play with the big boys or go someone else where people don't mind you constantly displaying your cognitive deficiencies.

No the money wasn't borrowed for a wage or a salary Kimy, it was borrowed for a house. How does the house produce income is what I have asked you.

Scarfie.  Usually takes about the second post for you to talk offensively.  Have you not worked out that such just destroys any credibility. 

For sure I do occasionally KH and perhaps call it a character flaw. But it usually when people insult my intelligence with their self centredness or stupidity. I think Kimy has crossed the line this time by a gross margin.

Kimy - to my way of thinking, one should appraise everything, all the time, and base that appraisal on the widest scoping you cranially can.
Thus I investigated PB's K-whatever-they-were waves. I came to the conclusion that they were somewhat like the Doppler effect you get when your motor and that of a truck alongside, beat as you both go uphill. I decided it is only relevant to those revs, and meaningless - or at least, loses relativity - when you change gear in either vehicle. To expect the next coinciding beat on the basis of the previous gearing, is - to put it politely - stupid. About as stupid as clinging to that MM thing, when one of the engines (income potential) has changed gear.
You, when I put up some learning links, went "yawnnnnnn". That denotes two things to me: an arrogance (an assumption that you know best, to the point that you don't need to learn) and an unwillingness to appraise the possibly personally unpalatale.
Nothing personal, but I discount - depending on the subject - your input on that basis.

Now considering your earlier posts show you to be far brigther than most property gamblers in here a post like this makes me think you are being deliberately obtuse at the very least.
So my understanding is the stock is 650billion and the debt is 200billion, except that 200billion is not debt against 650billion as  a decent % of the 650billion will have no mortgage on it (half?)  So that debt ratio becomes 60%, but it gets worse.
Then when we look at that debt against the actual housing we'll find a decent % is over 90% LVR, which with leverage that means a "decent drop" in the value of the "assets" wipes out the banks capital, forceing them to secure more funding. Its the crazy leverage ratio that will cause us so much grief...
So lets see some real numbers supporting your argument...if you think what Ive said is wrong...because unfortunaely for us I think you are wrong.

The problem is the degree of leverage Ive seen quoted.  Not sure the numbers here are as bad as say the US but we are not talking 25% before we get a problem but 10~15%. How hard is it for 10~15% to go under water? how many mortgagee sales did we have in 2008 and how many did the banks sit it out on?
How are you qualified or knowledgable to say the 'core" is stable? simply saying so when you are up to your eye balls in the game is a rank vested interest and is without verification therefore dubious.

"huge gains"? hello?
Assets, massive, need sellers to realise their value, tiny population, does not compute...
PS. Dont blindly quote the RB's numbers without looking at the detail.
PPS leverage....

He has always been a bit of a troll Steven but is really showing his colours today with his question dodging and shifting the argument. Kimy 82% of that $200m you keep repeating is loans agains residential property plus personal loans. You can work in aggregate, you have just tried to BS Steven with it. So how are those houses, in aggregate, going to produce the income to pay the loans over them?

While occasonally I talk philosophy this one is hard fact straight from your horses mouth Kimy ie: RBNZ stats. If you go back through the posts about 18 months you will find I posted this official data back then and at that time it went uncontested, it is only you that has a problem with the logic of the data.
Fact 1. The amount of New Zealand dollars in circulation (M3) is less than the total overseas liabilities (E3), or debt. (the site is currently down to confirm current numbers)
Fact 2. Of that E3 debt, ( $200m is your call on that number) 74% is against residential housing, a non income producing assett. A further 8% is personal borrowing.
Ask yourself this Kimy, would you borrow money to buy an investment property that you couldn't rent out? ie: borrow money for an asset you could not get an income from? When a tradesman buy tools he does so because they help him make something, making something brings him income. It is worth borrowing money to buy the tool because the tool will pay for itself from the income. The tradesman is confident about buying the tool because with the tool he has the means to pay back the loan plus interest. If the tradesman buys a radio so he can listen to music while working, does the radio help him produce extra income? No. Is the radio an asset that pays for itself? No
A house in New Zealand doesn't produce any income for New Zealand Kimy. I don't know what you find so difficult about that to understand.
So what we have in New Zealand using the tradesman scenario is 80% of tradesman borrowing money to buy a radio when they don't have a hammer. He or she should really use that loan to buy a hammer. Without the hammer how does he pay the radio off? He can't and some would consider him a fool for buying the radio.
With your property investments you are one of those 80% without a hammer but the need to pay off their radio. Good luck with that.

like he said we have huge assets yet a tiny population....ergo, when the game of musical chairs stops, pop go a lot of ppl....sadly of course mr and mrs first time buyer who just wanted their own home to raise a family in will be blown away.....Kimy, well if someone sold his kidneys I wouldnt care.....

Makes a great deal of sense. To pay off the debt requires someone to do work. Work is a transfer of energy so work is done on an object when you transfer energy to an object. Without boring you to death, PDK has already explained that to all who have listened. The key to that is the consumption of energy, its conversion, to liquidate that debt.
Kimy is speculating (gambling) that he will always be able to find enough "renters" who are in turn doing work to pay him his rents to allow him to pay off his debts. Kimy isn't doing the work himself but is dependent on others to do it for him. Same thing.

Kimy, you have an asset(s) that is/are illiquid. If you try and sell after this event has started it might be "entertaining" for you.... Now sure it may well be that you as an individual with assets that have built up considerably wont take a huge loss...however many others with 90%+ as an only home wont....and once the first time buyer stops there is no on sell and leverage. It speaks of huge drops and less than 5 years would seem to be pretty certian. Now yeah sure if you are retired you may well be no longer with us, anyway...
The sun blowing up is some billins of years away....OZ going from catching a cold today, to flu looks inside 6 months....time scale.

Your scenario does not follow Scarfie.

KH - one starts to question the validity of someone who purports to think, dishes out God-like damnations, then makes unsubstantiated, unreferenced, unexplained comments.
Please provide.

It will charge into the Auckland property present returning near 15% tax free..10% would be a piece of cake to get...still tax free...7% a certainty...again tax free....!

Slow down Wolly - you forgot to add the extra gains from leverage.  At 20% deposit, 6% fixed for two years what would that take ROI to?
500k x 10% x 2 yrs = 105k capital gain on 100k invested
Int on 400k x 6% x 2 yrs (int only terms) = 48k
Realisable tax free gain = $57,000
57/100 over two years = 29% per annum after tax Return on investment.  Have I missed something?  Not money in the bank unless you sell at the right time of course.  Assumes rental covers all other costs.

I'm a bit slow today are right of course..leverage...!

is there any tax deductibility for expenses?

Kimy, you are thinking of a pyramid scheme. In a ponzi everyone makes money until the fictional party falls over then everyone loses.

I alwasy wonder, if everyone decided to take their money out of the bank, and everyone who banks had lent to were required to pay their money back, would all depositiors get all their money back, and would the bank be left with money left over. That is how it should be, but I do wonder, if houses are so overvalued. 

No one could pay it back. In effect it would be a buyers market but for cash only with massive oversupply and sellers who have to sell. I'd assume thats half? the houses out there.
Nicole Foss of Automatoc Earth said that in reality in a credit event (whats coming a Greater Depression) houses are worth what ppl have the cash for, usually thats 10% ie their deposit.....
Due to leverage, no the bank would be bankrupt if only 20% of their mortgages dropped 20% in price, at least in that sort of order...let alone anything bigger, which is quite possible.

I reckon Kimy deals in legal highs, invests in tobacco and supports fracking.  Great money in it

In short a gambler? lots of others doing the same thing..fracking btw is starting to become obviously un-done....but then those of us with engineering know how knew it didnt add up well over a year ago...The key for a good gambler is knowing when to fold and walk away.

So Steven - when do you think this "greater depression" will hit NZ and houses will only be worth the cash deposit that a buyer possesses? 1, 2, 5, 10 years?

It has been creaping up on us for 50 years bigblue. Raw numbers that can't be denied & I have posted them here often enough.

A very good Q, I did say this was Nicole Foss's view....and worst case though Im starting to share it.. Approach it from another angle. If you look at the wage to purchase ratio it has always been 3 to 1, so a 50% loss right there....Then in an event ppls wages drop, BBs dying off and their children finding less able buyers, so 60~75% doesnt seem impossible....then peak oil and shrinking GDP....AGW impacts.....60%+ starts to look probable. 
From a financial event and looking at 1929 once it starts it takes 3 years, these days everything happens quicker of course....then again RBs are likely to fight it...unlike the 1930s...3 to maybe 5 or 6 years to bottom, thats 15% drop, when the CCCP collapsed they saw a 25% drop in one year so its not un-precedented..
When is the kicker,
Finacial point of view anything from inside 6 months to 3 years max I would suggest as the start of the event. We see the drops just from Bernankie thinking about tapering off, clarly he cant stop for 12+months or fear surpasses greed and its mayhem.
Peak oil point of view, max 5 years, ie we are extremely unlikely to stay on this production plateau past 2018
Population BBs dying off, 10+ years.
The thing is what is the trigger going to be.... anyway, 95% its less than 5 years, 100% its less than 10.

When it gets to the stage where China's PBOC has to intervene this strongly in interbank lending, then there is a problem.
No one else left, unfortunately.  USA, UK, EU - they have already shot thier bullets.
You can't print money forever, and you can't eat Gold or Palladium or Apartments.