By Roger J Kerr
As we anticipated, the term swap interest rates have been moving across the page on the charts over recent months. Interest rates raced up in NZ after the lows of February/March as the prospect of an export-led economic recovery looked good at that time and the RBNZ would be forced to unwind their very accommodating loose monetary policy settings.
Since then, the dramatic rise in the value of the NZ dollar has stymied the chances of an export-led recovery to positive +3% GDP growth in 2010. Swap interest rates have not been able to push higher because of this factor, however they have been prevented from rallying downwards due to rising (justifiably) swap interest rates across the ditch in Aussie. The differences between market pricing of shorter-term interest rates in 2010 and the RBNZ's view of the timing and return to neutral monetary conditions will continue for some months yet in my view.
So locally we have something of an impasse and the sideways crawl (thus stable market rates) will continue for the meantime.
The somewhat torpid and benign interest rate movement climate is just what our borrowing businesses and industries need at this time, even if it does not suit the impatient bank dealers who need market volatility/uncertainty to provide trading opportunities to make their annual bonuses.
Amidst this sea of calm and non-movement in local interest rates, the US 10-year Treasury Bond yield has rallied down from near 4.00% to 3.22% over recent weeks.
The US bond market in my view reflects or prices-in eventual economic / financial / investment market development much earlier than other markets.
The rally down in US yields is a little surprising given the massive volumes of new bonds that will be supplied by the US Government to the market over coming years to funds their budget deficit. Reasons behind the buying of US bonds vary from, the Federal Reserve buying under quantitative easing (now being reduced), to a an official desire to get US long-term mortgage lending rates under 5.00% to assist the housing recovery to successful auctions. Added to the list will be the inescapable fact that if you invest short in the US money market you get less than 1.00% return yield, yields for Government risk above 3.00% look pretty good in comparison.
Additional reasons for the recent decreases in US long-term interest rates may well be that the smart money is already moving out of riskier asset classes such as shares, commodities and currencies as they fear that those recent price gains are unsustainable and they desire the safety and security of Treasury Bonds.
I see merit in this explanation. Whatever the reasons for the drop in yields, the NZ 10-year swap rate has a lot of catching up to do. Since early August, US 10-year Treasury Bond yields have reduced 60 basis points, NZ 10-year swaps have reduced 20 basis points.
Do not be surprised to see our 10-year swap rates reduce at least 20 points to 5.75% over coming weeks.
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* Roger J Kerr runs Asia Pacific Risk Management. 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
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