By Roger J Kerr
There was one really surprising result in the recent survey of treasury management practice in New Zealand conducted by our PwC advisory group.
Borrowing entities with less than $100 million of debt had no more fixing of interest rates in place than they had at the time of the previous survey in 2009.
What’s more, despite market interest rates across the yield curve being lower than 2009 and the yield curve itself being considerably flatter (less premium to fix) there was no real intention to increase the percentage of fixing or the term of the fixed rate profile.
What the result tells us is that there must be a lot of confidence from these borrowers that inflation is dead in New Zealand and floating interests rates are not at risk of moving higher than the current 3.6% level.
Over the last four years, remaining floating rate has generally produced a lower annual interest cost for these borrowers and they see no reason to change that winning strategy.
These borrowers clearly see annual inflation in the New Zealand and the US economies remaining very low for many years to come.
They clearly believe that 3% plus GDP growth rates in both economies do not ultimately produce increases in inflation. They must also believe that oil prices will also remain at their now much lowers levels for many years to come.
I find it difficult to share their confidence about low future inflation and oil prices.
What is holding both NZ and US long-term interest rates at lower levels than the GDP growth and inflation outlooks suggest is the massive printing of money in Japan and Europe that has prompted global bond investors to switch to safer currencies like the USD and NZD.
As a consequence of this weight of investment flows, our interest rate yields have been pushed down and maintained at the low levels.
The risk management question for the borrowers betting on permanently low floating interest rates is “when do the US and NZ term yields become too low as well and the investment flows dry up and reverse?”
When that day arrives the increase in our term swap interest rates could be swift and severe.
Is that a risk that should be willfully taken?
* WACC is the weighted average cost of capital
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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