The race to the bottom

Bonds

Roger J Kerr says the 'risk-off' investor mode continues to drive yields lower

20th Jun 16, 11:32am by Roger J Kerr

The race to the bottom for interest rates around the world continues, with the latest “risk off” investor sentiment surrounding the Brexit vote this Thursday just the latest development that has driven long term interest rates to new lows.

Where it all ends with investors ultimately refusing to put new money into Government Bonds that have no yield return is impossible to predict.

Investor fear of global risks for the meantime is meaning that capital/principle preservation of investment monies remains paramount over investment returns.

Whilst massive excesses of liquidity slosh around the world there is no evidence yet of when this situation will change.

The US, Australian and potentially NZ situation with annual inflation not at zero, but closer to 2.00%, means that spending power of money saved is further eroded.

For these reasons it is hard to see property and equity markets suddenly reversing in New Zealand as more and more investors are seeking returns from these asset classes as the return from cash and bond portfolio investment no longer meets savings and return criteria for them.

Compounding the issue of lower long term interest rates offering no satisfaction to investors is the fact that the RBNZ really need to cut short-term interest rates again as the NZ dollar exchange rate is too high vis-à-vis our economic fundamentals and in terms of the annual inflation rate being below the 1% minimum limit for so long.

The RBNZ, however, seem reluctant to cut the OCR again as they believe getting inflation up too quickly (through a lower exchange rate) would cause undue volatility in output, exchange rates and non-tradable inflation.

My view is that the RBNZ need to have more trust in the macro-prudential tools to take the heat out of the housing market and do what is urgently required with a lower OCR to stop a catastrophe in the dairy sector and get themselves out of the breach of the inflation target band.

Daily swap rates

Select chart tabs

Source: NZFMA

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

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

48 Comments

by tomalteruk | 20th Jun 16, 11:43am 1466379836

Agree that RBNZ should act and not say that thinking or planing or watching.

Act now to put Income to Loan restriction, LVR or anything else that is possible to save the economy from future problem, for when it happens, it will be disaster.

One thing is for Sure that National government will not act and will be deaf and blind to what is happening in NZ.

So Someone will have to take the initiative and early the better. No Talking but only Action as it is whatever happens government will not act but blame RBNZ or Council and everyone else but themselves and their overseas friends.

by Simon | 20th Jun 16, 2:38pm 1466390307

Yup they need to cut hard and fast (mccullum our next governor? He cuts anything even from right in front of middle stump).

Consumer confidence is too valuable to put in such risk. Look at Japan as an example of how impossible it is to turn deflation around. At least inflation is somewhat self limiting and doesn't lead to a viscous never ending downward spiral.

by sharetrader | 20th Jun 16, 6:48pm 1466405338

i am not surprised many dairy farmers are in trouble, the old days of doing there best to wipe the debt out has been replaced with comments like this in Martins column yesterday. can see why they are in trouble, dairy cow prices have halved and the milk price is down, who knows if it will go lower yet or recover

http://www.stuff.co.nz/business/money/81079884/martin-hawes-managing-de…
comment made not sure if a farmer I think not, more likely a lender or advisor
You lend $500 for a cow with say $500 of your own money in aswell so get $1000 dollar cow she make say 300 ms at say $4 ms so makes you $1200 in milk . The interest on the $500 is say $40 so you make a hell of a lot of money out of your $500 debt. Not all debt is bad debt! I refer to bad debt as bad borrowers who don't own a calculator.

by Simon | 20th Jun 16, 2:33pm 1466389986

Cost of land per cow? Cows are cheap land is not. Your calc used on crops would show massive returns on cost of seeds v. Earnings from end product. It's the land costs and debt on the land that's the problem.

by Stephen Hulme | 20th Jun 16, 2:10pm 1466388606

How does the RBNZ, get themselves out of the breach of the inflation target band? Term interest rates in both sovereign and credit markets reflect stunted growth projections are far as many dare to forecast. View graphic evidence

Today, Japan underlined the reality that has to be dealt with no matter how far short end interest rates are dictated to fall.

Japan’s exports fell for an eighth consecutive month in May as shipments to China, the U.S. and Europe slumped, undermining Prime Minister Shinzo Abe’s efforts to revive the economy.

Overseas shipments declined 11.3 percent in May from a year earlier, the Ministry of Finance said on Monday. The median estimate of economists surveyed by Bloomberg was for a 10 percent drop. Imports fell 13.8 percent, leaving a trade deficit of 40.7 billion yen ($389 million). Read more

by J.C. | 20th Jun 16, 3:14pm 1466392452

Yet the yen has been and still is a great investment for the current climate. Doesn't make much sense to most people including myself.

by Stephen Hulme | 20th Jun 16, 3:46pm 1466394386

Professional arbitrage traders have certainly found it attractive.

Dislocations in Japan’s debt market are providing investors an unlikely opportunity to turn negative rates into assets that yield more even than Australian bonds.

The Bank of Japan’s policy experiments have pushed local fund managers to seek higher returns abroad, driving the cost of protecting the flood of money moving offshore from currency swings to a record in March. Some investors have spotted an opportunity in taking the opposite side of the trade, using the cross-currency basis swap market to turn Japanese government bonds into high-yielding synthetic assets. Read more

But what's good for Wall Street is not necessarily good for Main Street.

by J.C. | 20th Jun 16, 6:22pm 1466403744

Sure and good pick up, even though only bankers can really trade this one with ass covering. Been profitable for me by luck.

by Machiavelli | 20th Jun 16, 2:19pm 1466389197

A good summary thanks Roger.

by notaneconomist | 20th Jun 16, 2:21pm 1466389267

Don't worry Roger......NZ will save the day exporting fresh air to all those suffering from oxygen deprivation!! Don't people know not to breath under the blankets continuously???

by tomalteruk | 20th Jun 16, 3:05pm 1466391954

Hi Roger, One of my friend just raised a very valid point. Why has no journalist or anyone in opposition and media have asked for review of the overseas data as the National Party action or inaction on Housing Bubble is based on the that overseas data (3% Overseas buyer) that was released earlier and by the agencies own admission that data was faulty.

If the data is not correct and faulty than the national party policy which is based on that faulty data will also be faulty. So how come no one has ever raised the issue of getting the correct data as am sure Housing Crisis is a major concern to all economically as well as socially and getting the correct information from the buyers should not be much of a task.

Only because it suits the national party to hide behind the faulty data and justify their inaction, should not be acceptable to any journalist and kiwi. In future if the data is collected without manipulation and truth is out and otherwise (which will be) National party instead of being sorry will be themself and blame the agency for the fault as blames lies everywhere except them and their foreign friends.

Please raise issue for the correct data on overseas/Non Resident Buyer and that too without bias as we the New Zealanders have a right to know the truth.

If that data is wrong, The policy of national party to tackle the housing Crisis is wrong.

The question is more relevant now after the admission of Australia and Canada and also has to be something for the banks to take action.

by antonymouse | 20th Jun 16, 3:29pm 1466393340

Are You Listening, Canada: Australia Slaps Chinese Home Buyers With New Taxes

http://www.zerohedge.com/news/2016-06-19/are-you-listening-canada-austr…

by tomalteruk | 20th Jun 16, 3:38pm 1466393929

Important Question is - Will National Party Act now, as they normally gives example of other developed countries like Australia and Canada.

Sleep Mode Mr PM, but will have to come out of it. The earlier The better. It is Now between truth Vs Arrogance, let us see if truth will prevail.

by Stephen L | 20th Jun 16, 4:11pm 1466395904

They appear to have learnt from the Chinese Government how to produce data that everyone knows has no basis in reality whatsoever, but suits their argument. Have compliant mainstream media not to challenge it, and ignore everyone else.

by Justice | 20th Jun 16, 3:56pm 1466394986

US a "Peter Pan" economy

http://www.cnbc.com/2016/06/17/us-economy-just-doesnt-want-to-grow-up-b…

by MortgageBelt | 20th Jun 16, 5:35pm 1466400958

Cut, cut, cut, the RBNZ needs to cut as the Auckland housing market will keep rising regardless of the OCR.
The damage is in consumer confidence, household non-spending, small business confidence and a caution over all economic activity - outside of foreign investment, foreign purchasing of housing, unlimited immigration/student visas, tourism and proxy-foreign money flooding into NZ.

by Justice | 20th Jun 16, 6:33pm 1466404431

You really want to go deeper down the rabbit hole like Japan or the European Bank or the FED?

Raise it.

End the unsustainable debt binge putting everything at risk regardless.

Aucklanders have made their bed.

by Carlos67 | 21st Jun 16, 9:47am 1466459255

How many people are now on long term fixed mortgage rates ? the slightest sniff of a rise and the remainder are going to fix so basically a rise is going to have very little effect in the short term. The problems are elsewhere, half the people on this forum know how to fix the problem but its not being sorted by those with the power to change it.

by Justice | 21st Jun 16, 12:40pm 1466469650

Yeah Carlos I was going to point that out to MB also, but maybe someone should also point that out to the RBNZ who use the Auckland bubble to a great degree for hints at lowering?

But I believe raising would still have more of an effect to kill it as fixed rate mortgages are rolling over all the time

by sharetrader | 21st Jun 16, 12:54pm 1466470476

also as more people are now in the renter class, a cut to the OCR is becoming less effective in boosting consumer spending. Landlords sure dont pass on the cuts to tenants, it does delay rent increases though

by Joe Public | 20th Jun 16, 7:43pm 1466408587

Overseas data was fine

4% non resident
35% foreign workers and temp visa workers

So 40% approx properties are bought by foreigners. In Australia a foreign person is a non resident + temp visa residents + foreign students.

Nz media talk only about non residents buyers (4%)
Australia media talk about foreign person buyers (39% in nz)

Sutle difference yet in nz case one is 1000% higher than the other. Ie ten times more foreign person buyers than non resident buyers.

Wake up NZ the media are determined to downplay the foreign buyer issue

39% of properties bought by foreign persons. Demand is the problem not just supply. Demand causes supply shortages.

What percentage of buyers are not investors(local) or foreign persons? Love to know. 20%?

by bigblue | 21st Jun 16, 9:02am 1466456541

When Phil Twyford released Barfoot data showing 39% of buyers had Chinese names that was not at all racist but as it turns out it was a factual reflection of the state of play. The official govt data then confirmed that 39% of buyers were either based offshore or foreign students / temporary visa holders currently in NZ - mainly Chinese of course.

These young students are having a lucrative time in NZ as personal shoppers for their parents back in China and of course with cheap and perhaps "hot" money they are not at all worried about interest rates. They drive Bentleys, Ferraris, Lambhorghinis, Maseratis and Range Rovers to the open homes - the car dealers are loving it too!

John Key and his mates Bill English and Judith Collins are presiding over the very rapid Chinafication of Auckland and soon NZ, we have recently had Key meet with the chief of the Chinese Communist Party propaganda unit and now he wants to outsource infrastructure to Chinese corporations - the same types who have supplied faulty steel to the Waikato Expressway and who build "quality" structures that collapse back in the homeland.

https://www.youtube.com/watch?v=WeWPEGDhxt4
http://www.businessinsider.com.au/china-bridge-collapses-2012-8?r=US&IR…
http://www.nytimes.com/2012/08/25/world/asia/collapse-of-new-bridge-und…

When will NZ wake up and realise that this government is Shonkey?

Unless this sell off of our NZ housing stock is arrested soon we will head further into the mire as has happened in Canada:

http://www.macleans.ca/economy/economicanalysis/chinese-real-estate-inv…

by J.C. | 20th Jun 16, 7:50pm 1466409004

Impossible. What would you hope to achieve by raising rates? It would be better to keep lowering rates, even if they never went up again, similar to Japan.

by Justice | 21st Jun 16, 7:48am 1466452135

Remove and root out the 'over exposed' debt laden risk and determine again real values by destroying the crutches propping up what can't really stand on it's own, whether privately, publically, corporate or governmental.

This concept has a name: The 'NOT too big too fail'

Root out the economic rubbish, the economically irresponsible, the economically parasitic, the economic hinderances and nooses holding the world, and our own economy to ransom with their obese appetite for debt .

Japan etc are just delaying the inevitable. The end of the Yen

People just hate the fact that all Fiat currencies have limited life spans because the overall debts eventually outweigh the reality. The reality that Fiat has no real intrinsic value backing its creation.

Someone or something must hit the reset button.

by Zachary Smith | 21st Jun 16, 8:05am 1466453105

Just a bit too extreme really. No need to go all wobbly just because there is a bit of risk. Life is inherently risky, embrace it.

by Justice | 21st Jun 16, 12:35pm 1466469355

Lol. I'm only suggesting that interest rates be raised. Not joining a nazi party Zac.

by Zachary Smith | 21st Jun 16, 12:47pm 1466470024

Well, for a computer engineer "hit the reset button" is the last resort.

by Justice | 21st Jun 16, 4:36pm 1466483790

Zac that day was really back in 2008. What we see is all smoke and mirrors to give the illusion of health to our fractional reserve systems

by ham n eggs | 21st Jun 16, 1:19pm 1466471971

impossible to hit the reset button - risk and debt is too interconnected across borders and markets. The system has evolved to the complex but vulnerable beast that it is. The only thing that will reset is a crash - but chances are there wont be a reboot option. Because a debt jubilee wont solve the key problem; which is the end of cheap energy and easy resources. All fiat currencies will soon be worthless energy tokens.

by Justice | 21st Jun 16, 4:37pm 1466483876

Why use the term 'impossible'? I'm a designer, it's a word I don't use very often.

by ham n eggs | 21st Jun 16, 4:48pm 1466484516

impossible because you would need to organise a coordinated debt amnesty across nations /banks /corporates about what is bad debt and what isnt. You cant just write all debt off - because they eliminates pension funds, asset values, bank solvency etc. You also dont solve energy issues by wiping debt. Yip, its impossible.

by Justice | 21st Jun 16, 5:01pm 1466485291

Who's saying write off any debts?

Ham, take the time to read my comments properly. Then get back to me

Drawing out unsustainable debt is not the same as writing it off.

by ham n eggs | 22nd Jun 16, 9:13am 1466543618

And my point is all debt is now unsustainable - we need debt growth to keep the system ticking, not just drawing out of existing debt. Money not backed by energy is only a bubble, and we are in huge energy deficit territory now - banking cheques against an energy future that doesn't exist. The only thing keeping energy companies (ie coal, oil) afloat is unsustainable debt courtesy of money printing. It cant last and a financial reset is not possible as it does not change the physical nature of the problem ie the low hanging fruit has gone and most energy extraction is now non viable.
If you raise the oil price, you crash the economy, if you dont raise the oil price you crash the producers.

by iconoclast | 20th Jun 16, 8:23pm 1466411012

Right from the horses mouth - sections at Hobsonville

James Law, principal of James Law Realty, said his firm had sold the sections on the city's northwestern fringe mainly to people who had recently arrived from China

Those migrants have snapped up nearly 300 new land parcels since early last year

James Law said 97 per cent of the buyers were recent Chinese migrants

Not one was foreign-based. All "currently" resident in NZ

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116…

by Joe Public | 20th Jun 16, 9:40pm 1466415623

Statistics will tell you that 35% of those buyers are likely to be Foreign Students & Temp Workers on Visas.

Foreign Persons......as Australia classify them and tax them with additional Stamp Duty to help fund infrastructure.

Again Non Resident is much smaller than Foreign Persons. Non Resident buyers are 10 times smaller than Foreign Persons buyers in NZ.

by Patricia | 20th Jun 16, 9:41pm 1466415663

This National Government will go down in history as the worst Government New Zealand has ever had. The damage it has done to the economy, to the people, to the environment through its inaction and lassiez faire atitudes will take many many years to repair. If ever. If New Zealand had had this type of Government during the first half of the 20the century nothing would have been achieved. Not. A. Thing

by fat pat | 20th Jun 16, 11:02pm 1466420540

I think the damage is already irreversible. There’s been too much wealth transfer for the story to end well.

by Zachary Smith | 21st Jun 16, 7:35am 1466451347

..the damage is already irreversible

You can't really fix multi-culturalism. The only way would be to seal the borders and wait several generations for some sort of national consciousness to evolve à la North Korea.
The modern world is every man for himself. It's not great for the long term prospects of a society but there you are. In the short term it is marvelous and you really wouldn't want it any other way.
The future will either be like Orwell's 1984 or Game of Thrones I reckon.

by David George | 21st Jun 16, 8:34am 1466454873

JK reckons (at the end of the day) she's all pretty good, no problems. Those people live in cars because they prefer it that way and China's going to build all the infrastructure we need. Enough for at least another 10 million in the big A.
OTOH Michael Reddell has actually (ackshully?) done the maths:

"there has been no overall growth in tradables sector real GDP per capita for more than 15 years.

Successful economies, building on a sustainable footing, do so by selling more and different stuff in competition with the best the rest of the world has to offer. That doesn’t describe New Zealand at all – under this government or its predecessor.

We have

no productivity growth
a continuing high unemployment rate
ruinous house prices, and
a tradables sector that has achieved no per capita growth for 15 years.
And yet, so our ministers and officials tell us, our immigration policy is a “critical economic enabler”. Frankly, it seems bizarre that, as a matter of policy, we bring more and more people – many of them just not that skilled anyway – to such an underperforming place. It is as if theory trumps experience. New Zealanders pay the price for these political and bureaucratic preconceptions, and for an unwillingness to look out the window and recognize that all is far from well with New Zealand’s economy. Even Australia, for all its challenges, just keeps doing better."
https://croakingcassandra.com/2016/06/20/some-snippets-on-new-zealands-…

by Stephen Hulme | 21st Jun 16, 9:15am 1466457340

And we are on route to spend a fortune on military hardware, we can ill afford, to defend ourselves against what and whom - our most significant trading partner? Read more

by BadRobot | 21st Jun 16, 6:09pm 1466489365

A particularly vicious bunny rabbit....

by Zachary Smith | 21st Jun 16, 6:43pm 1466491419

I think the word "defence" is probably a bit of a misnomer. The reason for the spending is more likely to be to enable our forces to participate in globalist military activities with our allies rather than repel a hostile invasion. Also to assist wherever and whenever in the Pacific region.

I don't think much of that blog piece linked to above. He ends his essay with this:

As the Costa Rican President realised 68 years ago, if you maintain a body of armed men, then they will forever be searching for opportunities to use their weapons. If not provided with foreign foes to fight, they will start looking for enemies at home.

Which is pretty insulting to our loyal and professional armed forces. We have a modern and dedicated force that has never engaged in such activities.

by BadRobot | 21st Jun 16, 7:14pm 1466493284

But oh so true......

by linklater01 | 21st Jun 16, 8:59am 1466456387

"National consciousness to evolve a la North Korea". Well and here's me thinking that it is just a brutal dictatorship. How could I(and perhaps a few others), have got it so wrong?
Nothing like a bit of racial purity to make the world a better place.

by Zachary Smith | 21st Jun 16, 10:15am 1466460925

It was noted recently that the Eastern European countries retained much more of their culture intact than the Western countries despite communist rule. It may not have anything to do with racial purity so much as sealing from outside influences. I imagine if you sealed up NZ a unique culture would develop despite the different races.
What I am pointing out is that the cost is very high to develop a "Kiwi" consciousness. We have now gone global and most people like it. A lot of commenters seem to want to be global as well as isolationist.

by tomalteruk | 21st Jun 16, 9:25am 1466457939

Yes and we voted for them.

Karma. We have to pay the price for our wrong decision.

by DFTBA | 21st Jun 16, 9:32am 1466458353

Speak for yourself. I never voted for the man, or the party.
.
But I still have to suffer the consequences of the stupidity, greed, and self interest, of those who did.

by tomalteruk | 21st Jun 16, 9:23am 1466457787

Who says major decisions are to be taken in consultation in parliament. They are taken by the bosses as are being voted to RULE NZ and not to serve NZ.

May be am wrong and is not a big decision.

Anyway what will parliament do as can be seen from the Veto on paternity leave.