Over the last week, wholesale swap rates have bumped along at their lowest level for over eighteen months, and there seems little prospect of higher rates soon.
European and North American economies are stumbling along, and our growth is anemic. The disappointing GDP data out earlier in the week is not encouraging, especially as the current quarter is not likely to be anything special either. Earthquakes and tough farming conditions won't help.
It is somewhat helpful however that Australia is booming, and their good fortune is related directly to China who in turn seems to be weaning themselves off the American consumer and driving ahead based on their own domestic demand. That should mean we are held up better than otherwise if we can appeal to the Aussie and Chinese buyers of our products.
If we can't, then our future could look more like Ireland or even Greece.
Businesses are deleveraging. Demand for wholesale money is modest. Yields are slipping.
Lower yields mean the face value of such bonds are rising. A modest bond rally is underway.
The only rising yield line in these charts is the two year corporate series, and that is because those bonds feature components from Works Finance (WKS010), and Prime Infrastructure Networks (PIN020), both of whom are struggling, and whose debt is being steadily marked down (yields up) on the NZDX.
Most corporate debt is issued by companies in good shape. They attract yields that are in fact quite low compared with bank term deposits - somewhere about 100 bps above bank rates. (And don't forget buying bonds on the NZDX costs you fees, versus the fee-free TDs.) This is interesting given the economy and its immediate prospects.
But corporate bond yields are around 200 bps above Government bond yields on average, which may be a fair premium. It may in fact point out that bank TD yields are unusually high in the current business cycle - thanks to the RBNZ core funding ratio requirements and the adjusting reponses that imposes on our banks.
Of note too, is that yields on SOE debt are similar to private corporates. Would any Government let a 100% state-owned-enterprise default? Maybe this is a good way to get sovereign security at premium yields. After all, if the Government will pay out the South Canterbury bondholders at 100% (and ensure their interim yields were also made good), there seems little reason why they would not back bondholders at NZ Post, for example, if they also got into commercial strife.
NZ Post (NZP010) is yielding 6.90% for a bond that matures in about 4 years. Bank TDs is pay about 100 bps less,
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