Swap rates dive after OCR cut

Bonds

Swap rates follow the OCR to record lows. 1 yr down -33 bps since January, 5 yr down -43 bps over same period

10th Mar 16, 12:25pm by David Chaston

Today's surprise OCR cut by the RBNZ has not only reduced this benchmark to a record low, it has driven wholesale interest rate swaps to record lows as well.

One year swaps have fallen -19 bps so far today, two years have fallen -18 bps, and three years have fallen -17 bps.

The five year is at 2.52%, a -15 bps fall, and the ten year is at 2.99%, a -10 bps fall from the positions they opened at today.

In fact, every single one of them is now at a record low.

The benchmark 10 yr swap rate has now fallen below 3%, the latest in the set to do so.

Interest rate swaps are now at these levels in late morning trade in New Zealand:

OCR review dates	10-Sep-15	10-Dec-15	28-Jan-16	10-Mar-16	reduction
				(mid-day)	since 28-Jan
	%	%	%	%
OCR	2.75	2.50	2.50	2.25	-0.25

90 day bank bill rate	2.85	2.74	2.70	2.38	-0.32

1 yr swap	2.68	2.70	2.59	2.26	-0.33
2 yr swap	2.75	2.74	2.63	2.26	-0.37
3 yr swap	2.84	2.84	2.72	2.31	-0.41
4 yr swap	2.97	2.95	2.83	2.41	-0.42
5 yr swap	3.09	3.07	2.95	2.52	-0.43
7 yr swap	3.33	3.32	3.18	2.74	-0.44
10 yr swap	3.60	3.57	3.41	2.99	-0.42

Daily swap rates

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Source: NZFMA

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22 Comments

by Brutus Iscariot | 10th Mar 16, 12:54pm 1457567665

5 year swap rate now 50bps below the point where the banks decided to raise rates for that term at the end of 2015. Must be real pressure on the medium and long end mortgage rates soon.

by Machiavelli | 10th Mar 16, 12:55pm 1457567714

Can someone tell me this. I am correct in that the lower the swap rates go, the more expensive it gets to break a fixed term loan? (If I'm completely off the mark, please remember there is reportedly no such thing as a stupid question)

Low interest rates are very exciting for borrowers but a lot (like me) foolishly fixed long term last year. We only get to enjoy the super-low rates on new lending.

by Justice | 10th Mar 16, 1:13pm 1457568818

Why on the current environment which has been obvious for quite a few years (since 2008 in fact) have people lost faith in floating? The banks can't raise now ever. Rock .....hard place. Raising will kill them along with the gigantic global bubbles. They know it. Can some of you explain your logic under current economic conditions please?

by Yvil | 10th Mar 16, 1:44pm 1457570671

Simple, a 1year rate is way cheaper than floating and still provides flexibility every 12 months

by dictator | 10th Mar 16, 1:51pm 1457571070

I've been telling people to get 1 year fixed and they're happy to get the savings over being on a floating rate. It's long enough to get a benefit and but not so long as to have floating rates drop below fixed significantly. That way you don't miss out on OCR drops.

by Machiavelli | 10th Mar 16, 3:27pm 1457576859

Bad advice from mortgage broker... I learnt my lesson.

by dictator | 10th Mar 16, 1:30pm 1457569826

Say you have a fixed mortgage for 5.5% with a term of 3 years the bank expects to get all of the interest due for the entire term. If you refinance with the same bank to 4.5% they are going to want that 1% difference for the 3 years. That's a simple explanation for it. If interest rates go up they don't care as they can lend the money to money else and make even more money.

I fixed back when the RBNZ was threatening to massively increase rates a couple of years ago to hedge against the increases. Turns out I bet in the wrong direction.

by Geoff | 10th Mar 16, 4:11pm 1457579497

an Option could be break the loan and go to a new bank.There will be a fee to break but the new bank should offer you a cash incentive that can cover the cost of the breakage fee. In the end you'll end up with a lower interest rate going forward.

by Geoff | 10th Mar 16, 2:06pm 1457572010

Hi Nachiavaili,

Its not such a big issue to break a loan, you will be penalised but if you change banks you will get the money back with an incentive. We paid around 18,000 to break a number of loans over a 3 month period but got cash incentive of $15000 from the bank we changed too. We dropped from 6.5% to 5%. Hope this helps.

by Machiavelli | 10th Mar 16, 3:26pm 1457576808

Thanks Geoff. Other banks will give some cash but the total of all the break fee amounts combined is pretty high... $50k. It's not all bad because my loans are mostly low 5.xx% already and I did get some good cash incentives when I fixed them.

Can I ask which bank you changed to?

by Geoff | 10th Mar 16, 4:01pm 1457578891

I changed from ANZ to Kiwibank, The 1% incentive was fixed in for 2 years where if I broke banks I would have to refund the money. BNZ also offered 1% but locked it in for 4 years.

by steven | 10th Mar 16, 2:07pm 1457572026

Depends I suppose if you are wedded to an economic ideology or not. So fixing for 1 year has cost you some basis points, that cant be a huge "loss" surely?

My personal view is we'll never see a high sustained OCR again, ever (ie above 4%). That is how I see the post peak-oil world unfolding ever more deflation and asset value destruction. Now can there be nasty interest spikes like say Greece? yes as that is the retail rate and not the OCR. Sure you enjoy super low rates but if you cannot sustain the income on that asset that asset's value will drop, however the debt will remain.

by bigblue | 10th Mar 16, 7:53pm 1457592824

yep plenty of Kiwis were sucked in by the economists, bankers, Wheeler and other commentators and fixed at the wrong time. The longer you leave it the heavier your break fees will be - how long did you fix for?

by KH | 10th Mar 16, 1:12pm 1457568726

In a word yes. In fairness to the bank it funded its deal with you by borrowing at rates that are higher than now. You break the loan they are left with 'expensive' money. So you compensate them.
But 'fairness' is of course a joke word with banks. They will screw out of you what they can.

by Cowpat | 10th Mar 16, 1:17pm 1457569065

David Chaston, having read Roger Kerr's commentary on Monday, I would suggest that the time has arrived to remove the author. Many of the so called amateurs on this site have a substantially better grasp of economic conditions,by leaving a contributor so inept and open to persistent ridicule adds nothing to the website, for many readers , some less financially literate may have been swayed by this 'experts' view over the past years. Simply because AMP lurks somewhere is inconsistent with the overall tone of the website.

by Stephen Hulme | 10th Mar 16, 1:39pm 1457570367

Hmmmm....

The NZ government 4.5% 15/04/27 bond is currently trading ~ 2.94% and the 10 year swap is as you claim 2.99% mid.

This is absurd in terms of risk discovery veracity. The swap spread is too skewed to the left.

It seems there is not a single reputable market maker with balance sheet capacity capable of borrowing wholesale floating and hedging that liability by paying fixed to receive floating for no other reason than a probable profitable arbitrage opportunity. This is a dire turn of events.

by dictator | 10th Mar 16, 1:56pm 1457571380

Things seem to be getting tight in the banking sector. Even when the OCR cut was discussed prior to a meeting the financiers did comment that rates cuts are going to be difficult to pass on. They did echo what banks are saying publicly.

I'm wondering if profits are getting slim at the big banks.

by steven | 10th Mar 16, 2:10pm 1457572200

and the banks share values has done what over the last 6 months?

by Machiavelli | 10th Mar 16, 3:28pm 1457576931

ANZ has picked up quite a bit very recently. Admittedly after tanking...

by bigblue | 10th Mar 16, 7:58pm 1457593128

C'mon these greedy banks have higher margins than ever and are reporting billions in profits - they are truly taking the piss by not immediately passing on this rate cut - Kiwis should be furious

by steven | 10th Mar 16, 2:08pm 1457572129

isnt that interesting....

by Zeds are Us | 10th Mar 16, 8:58pm 1457596708

Zed's simplistic view:

So if I'm getting paid in USD and the NZD drops as a result of this I should be better off right?

And the price of imported goods will rise and there should be a higher tax take, great NZ will have more money for public services?

Plus I have more change in my pocket because my mortgage rate has dropped (assuming I've floated or fixed short term and don't pay down debt or invest in another...property..that's all there is right?). Or my business loan has reduced because of this OCR change (good luck with that).

As much chance of making a quick buck as winning Lotto or had a ball at Sky Tower Casino ... unless I'm a bank (quick buy shares)

Ah but.... I've save all my life and living off interest so now I've got less change in my pocket. Even if I am a NIMBY Boomer who deserves no less...

And now I'm confused because none of this adds up and to make it worse the OCkeR banks are allegedly acting like a cartel (is that legal?)...This is like unemployment, not working.

At least we can make a difference.. change the flag! Huge difference - cost a fortune but ($26 million is the tip of the iceberg).

I reckon best drop the GST rate, make Google, Facebook, Apple et al, pay their fair share (to be sure to be sure to be sure), reduce Government spending on the fluffy stuff and their corporate mates, and diversify.

All in one day? ...or 8 years of the current administration and still counting.