By Craig Simpson
Investors continue to second guess just when the US Federal Reserve will trim its US$85 billion monthly asset purchases. Market participants are widely expecting the Fed to taper sooner rather than later and a recent Bloomberg poll shows 65% of economists agree, which probably means the Fed will not move just yet !
Global bonds continued their sell-off in August and US 10-year treasuries broke through the 2.8% level, their highest point in 2-years.
The 10-year NZ swap rate broke through the 5% mark for the first time in a couple of years.
Probably the single biggest event in August that directly impacted the NZ fixed interest markets was the Fonterra contamination scare. The negative sentiment and reputation fall-out saw our swap and bond yields spike.
We have also seen some further steepening in the NZ swap curve as more home owners move to fix their mortgage rates as banks start to gradually increase shorter term mortgage rates.
In other data released during August, foreign owners continue to hold a majority of the NZ Govt Stock available with current numbers showing approximately 70% of stock on issue is held offshore. Also credit rating agency Standard & Poor's affirmed NZ's sovereign credit rating and the retained a stable outlook.
We also saw the announcement of the somewhat controversial Loan-to-Value-Ratio (LVR) restrictions for the banking sector which take effect from October 1.
Market performance indicators
The misery for bond investors continues with the major market indices continuing to record losses.
Ironically, these losses will be felt in those conservative KiwiSaver portfolios and bond funds which traditionally have been marketed by advisers as having characteristics such as 'capital stable' and with little chance of experiencing a loss.
While the 'losses' are paper losses until they are realised it does serve as a reminder there is plenty of risk in bond investments and investors should be regularly reviewing their portfolios.
The NZX Government Bond Index was down over 1% for the month and is now showing for the year to August 31, a loss of 1.85%. Since March 2013 investors in NZ Govt Stock have lost approximately 3.5%.
Many of the bond indices are still in negative territory for the three-months ending August 31, quarter. The exception is the Citigroup World Global Bond Index unhedged in NZ$ terms which posted a return of +3.4% for same period.
Investors holding unhedged global bonds continue to benefit from recent market movements, although when looking at the 12-month picture investors holding fully hedged to NZ$ holdings are ahead by approximately 4.5%. This variance in performance between unhedged and fully hedged positions simply highlights the volatility in both bond and currency markets at present.
The RBNZ actually did it
Contrary to some commentators saying the RBNZ would not implement Loan-to-Value-Ratio (LVR) restrictions, Governor Wheeler and his team actually went ahead and announced the introduction of restrictions from October 1 this year. The terms of the restrictions were tougher than some had initially expected and maybe this is what was needed to cool off the over-heated property market.
The swap market is seeing some upward movement in rates as home owners shift from floating to fixing their mortgages.
For more on the LVR restrictions and what this means for home owners you can read one of our many stories on this subject here along with another recent and interesting piece from ANZ here.
If the current market pricing and forecasts are correct then in a few months we may well see New Zealand leading the way on the interest rate front says broker Forsyth Barr.
Recent statements from a number of the main central banks highlight the various different parts of the cycle that central banks now find themselves on.
The following is an extract from Forsyth Barr's recent fixed interest commentary posted on interest.co.nz.
RBNZ – Our own central bank risks undoing all its hard work on the lowering the NZD with its recent hawkish tone and subsequent ‘on hold’ calls by other central banks. Current market pricing has one +25bp hike priced in for March 2014 with another in April 2014. Upward bias to OCR.
The next RBNZ Monetary Policy Statement and OCR review is on Thursday, September 12.
RBA – The recent -25bp cut took the Australian Cash Rate to its lowest level (2.50%) since the central bank was established in 1959. While one further -25bp cut remains priced in before the end of 2013, the upcoming election clouds the timing of that possible cut. Downward bias to the cash rate.
At their September meeting the RBA held rates at 2.5%.
US Federal Reserve – The Fed is obviously the most closely watched of the central banks and comments over the last few months have put the Fed under more scrutiny. The Fed hasn’t done a great job in its “taper talk”, as it is now referred too, with a number of Fed officials stating differing opinions. What we have is the possible removal of US$85bn per month from the markets which will impact both debt and equity markets. While unemployment is tracking down, there is still some way before it hits the 7% level which would initiate some removal or tapering of the Fed’s stimulus programme. No interest rate changes on the horizon.
The next FOMC rate announcement is due on Thursday, September 19.
ECB – At the most recent European Central Bank meeting, the governor stated “key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics”. No interest rate changes on the horizon.
The next ECB meeting is Thursday, September 5 and no change to the current rates is expected.
BoE – The new Bank Of England’s Governor. Mark Carney, has changed things around and is now offering ‘forward guidance’. In its attempt to steer expectations about future rate rises, the BoE’s forward guidance is now similar to that of the Fed’s unemployment target. Interest rates will stay low (0.5%) until unemployment falls to 7% (currently 7.8%). The BoE doesn’t expect this to occur until 3Q16. No interest rate changes on the horizon.
The next BoE meeting is Thursday, September 5 and no change to the current rates is expected.
BoJ – Japan’s national debt has just passed the 1,000 trillion yen mark! And is now twice the size of its economy. The Bank of Japan is hoping its pledge to double the supply of money in two years by purchasing government bonds and risky assets, this will help spur growth . No interest rate changes on the horizon.
The next BoJ meeting is Thursday, September 5.
Bond issues, tenders and offers
During August the following issues,tenders and offers were made:
- NZ Govt bill tender number 1453 for $280 mln attracted bids of NZ$756 mln with an average weighted yield of 2.515%
- ANZ offers NZ$200 mln worth of floating rate notes with a maturity of 2020
- SOE Transpower to borrow money through the issue of 10-year Australian dollar denominated bonds - the interest rate paid was announced as being 5.75%
- NZ Govt Bond tender number 501 for NZ$300 mln received bids for NZ$815 mln with an average weighted yield of 4.3543%
- Inflation Indexed Bond tender number 500 for NZ$300 mln received bids for $683 mln with weighted average accepted yield of 2.3204% (versus 2.2455% previously)
- Aussie low-baller targets Fonterra bond holders with an offer significantly below the current price
Something you may not know about Australia
Australia has an official debt ceiling law, very much like the US. The latest budget woes show that it will need to legislate before the end of 2013 to raise the official limit, which is currently set at A$300 billion. It is expected to hit $A370 billion by April 2016, and is currently sitting at A$260 billion.
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Story updated to include ANZ NZ$200 mln Floating Rate Note issue and added link to follow up story covering Transpower issue.
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4 Comments
speculators and margin calls.
What is margin debt? Why do global investors have to pay attention?
In its basic terms, (NYSE) margin debt can be explained as the USD value of securities purchased on margin within an account. Margin debt carries an interest rate, and the amount of margin debt will change daily as the value of the underlying securities changes. When setting up a margin account with a stock brokerage, the typical maximum for margin debt is 50% of the value of the account – a threshold that was last adjusted by the US Fed in 1974. In order to prevent a margin call (a request to raise collateral in the account), the margin debt must remain below a specified percentage level of the total account balance, known as the minimum margin requirement (or maintenance margin). Not all securities are available to be purchased with margin debt, especially those with low share prices or extreme volatility.
Different brokers have different requirements in this area, as each may have its own list of marginable securities. Margin debt levels, and their rate of change, are sometimes used as an indicator of investor sentiment because margin debt rises when investors feel good about the prospects in the stock markets. In the past, margin debt levels have peaked before market indexes reached relative peaks. When markets decline in a hurry, a large number of margin calls will usually come due, which can add to already heightened selling pressure.
with the bond market weakening, the cost of margin debt is going up which will also trigger liquidation of this debt with an obvious impact on stock prices supported by this borrowing.
JB
You are right with your comments re those holding to maturity.
An issue I see is for those investors in a lifestages type KiwiSaver Fund where they are close to retirement and therefore are invested in say 80% fixed income assets. These investors could be seeing the value of their nest egg is decreasing and this in turn may compromise their retirement lifestyle.
The other point I would make is how fixed income assets are marketed to clients as being capital stable or low risk - in theory correct in real world not always the case.
NZ Herald website http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obj…
Never overlook the diversity of profitable trades available to note/bond spread traders, especially in other markets where liquidity is outstanding and bid/ask spreads are less than the width of a bus.
I can certainly point out a recent example: buying the 30 year bond and selling a duration matched quantity of the T10's or T5's has been an abosolute winner for young and old alike.
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