By Roger J Kerr
The probability of US long term 10-year Treasury Bond interest rates correcting back down again (as they have repeatedly done so since 2009) seem to be dwindling.
Current 10-year yields at 2.35% seem much more likely to increase from here as US short-term interest rates continue to increase in markets.
US economic data for housing. jobs, retail and manufacturing continues to be really positive and the Trump tax reform bill now seems a lot closer to being passed.
There is also emerging evidence in the US economy that the blip down in inflation earlier this year was indeed temporary, or “transitory” as Fed Chair Janet Yellen always insisted was the case.
The US bond market now seems to have moved on from the disappointments earlier in the year when Trump failed to deliver on any of his promised growth agenda i.e. infrastructure investment, tax reform and repealing Obamacare.
The irony is that the US economy has continued to expand at a robust clip despite Trump’s lack of delivery on his promises.
There do not appear to be any economic reasons (in the US or globally) for US long-term interest rates to move downwards in direction.
Rising oil prices over recent weeks will be pushing up general inflation in the US, which supports the Fed plan to keep increasing their short-term interest rates next year.
The only question is how soon the US 10-year Treasury Bond yields move above the previous resistance at 2.60%.
Our long-term swap interest rates will follow the US yields higher.
The only factor that would push long-term interest rate back down again would be a global geo-political shock.
We have not experienced any great “flight to safe-haven” in the bond market due to this risk for more than 12 months now.
The North Korean situation has not escalated to a point to cause wide-scale buying of bonds for safe-haven reasons.
New Zealand 10-year Government Bond yields and thus swap interest rates closely follow the US 10-year Treasury Bond movements.
The margin that our NZ bonds trade above US bonds is currently 55 basis points (2.90% c.f. 2.35%).
That bond margin or spread can be expected to increase over coming months as the new Government adopts a looser fiscal policy and bond issuance (Government debt) increases.
New Zealand’s risk premium above the US will naturally increase as the bond markets build in the new Government’s higher spending agenda.
Roger J Kerr contracts to PwC in the treasury advisory area. 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