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The following is a summary of the key events impacting fixed income markets over the past week.
RBNZ continues with the LVR threat
Reserve Bank of New Zealand Deputy Governor, Grant Spencer, outlined the Central banks thoughts on housing once more in a speech last week. The RBNZ continue to express their concerns that the New Zealand housing market “is a threat to future financial stability”.
The RBNZ lay the blame at limited house supply and the supply of easy credit as underpinning house price inflation. Obviously the RBNZ cannot do anything re the limited number of homes in New Zealand but it can (or at least attempt to) impact the supply of credit.
Two key points
The two main points from the speech was the comment that “higher interest rates are not the right policy response at this time” and that the loan-to-value-ratio (LVR) instrument is the tool that the RBNZ favour at this point in time to achieve their objectives.
The success of macro-prudential tool may have a significant impact on the use of the Official Cash Rate (OCR) or at least the timing of a potential move in the OCR. The RBNZ do state that the macro-prudential tools are not a ‘panacea’ and the success of LVR restrictions in other countries is evidence of that.
LVR restrictions - Do they work?
Looking at a number of countries who have implemented LVR restrictions, the results are mixed but overall there appears to be some success which will encourage the RBNZ.
Hong Kong has had LVR restrictions for some time and the evidence derived from their experience is that a LVR policy reduces credit risk faced by the banks and assures the quality of banks’ mortgage loan portfolios.
Sweden’s LVR policy has broken the trend of steadily rising LVR ratios, however the property market in Sweden continues to grow at levels seen as uncomfortable by the Government. The LVR limit is likely to be lowered in Sweden as it is in Norway where a similar effect has occurred.
Enforcement of the lending standards legally (or at all), is another issue that some of the countries face. In Canada, there is a LVR limit of 95%, although this is not enforced and banks freely lend the remaining 5% to home-buyers!
In our view the RBNZ appear to be doing all it can to bring house prices down (threatening the supply side of credit i.e. the banks) without heading down the draconian policy path.
However, until the housing market loses its tax advantage over other asset classes, it seems unlikely demand will wane anytime soon and despite the Global Financial Crisis still fresh in everybody’s mind, the banks remain ambivalent to writing loans with a 100% LVR.
US officials calm markets
Fed officials tried to clarify its position on its support for the world’s largest economy after a week of listening to market commentators talk of tapering and possible forecasts if the Fed adjusted/ended its asset buying program.
Federal Reserve Bank of New York and vice-chairman of the Federal Open Market Committee, William Dudley, stressed in a speech that the newly adopted time-line for reducing the pace of bond buying depends on the economic outlook, and that outlook remains quite unclear. Dudley said that asset purchases may be more aggressive than the time-line Bernanke outlined on 20 June if US economic growth and the labour market turn out weaker than expected.
And as it happened, the US government revised its growth figures for Q1 from 2.4% to 1.8% with consumer spending in particular, much weaker than first thought. Consumer spending counts for two-thirds of US economic activity.
Credit markets
As interest rates had a somewhat consolatory week after the previous weeks violent moves, credit markets tightened across the globe. European credit markets contracted by -14bp with Australia in second place at -11bp and US credit spreads tightening -10bp.
What’s coming up this week?
The main focus of the markets, both locally and abroad will come at the end of the week with the US unemployment rate released. Consensus forecasts are for a slight improvement in both the monthly non-farm payroll data (+160,000 expected) and the US unemployment rate (7.5% versus the current 7.6%).
No doubt if there are any surprises on either the positive or negative side to those numbers, talk will be about the impact to the proposed tapering timetable.
Corporate / Credit news
Australian banks continue to hoover up Australian state government bonds, with their holdings now at record levels. Securities sold by the Federal and State governments are the only assets in Australia that count as liquid assets under Basel III. As at 31 March 2013, Australian banks owned 37% of the outstanding debt.
Credit Agricole S.A. had its A credit rating affirmed by S&P. The outlook remains negative.
Goodman Fielder (GFF) provided a trading update for the full year. GFF stated that retail trading conditions, particularly in Australia, remain challenging, however GFF continued to move forward under its three-year strategic plan. EBIT from continuing operations for 2H13 is expected to 15-20% compared to 1H13 with positive earnings growth in its grocery and dairy divisions.
The Head of the New Zealand Debt Management Office (DMO), Brendon Doyle, said the increased foreign demand for New Zealand Government Bonds has come from central banks and sovereign wealth funds in Asia and Europe.
The RBNZ bought NZ$90m of NZD in May. The purchases partly offset some of the selling (net NZ$256m) the central bank did in April as it tried to weaken the ‘Kiwi’. Finance Minister, Bill English agreed (with recent RBNZ comments) that the ‘Kiwi’ was still overvalued but it had weakened by~10% since peaking at US0.86c in April.
Transpower (TRP) said it will pay a special dividend of NZ$65.7m to the New Zealand government this month after concluding the sale of derivatives trading unit to ASX in May.
The UK government announced it would sell £15bn of state owned assets by 2020 in order to bring down its debt. The government has extended its austerity program to 2017 - 2018 due to weaker than expected economic growth.
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