We are keeping a close eye on how local wholesale rates are reacting to the Fed's rate hike and signals that more are to come in 2017

We are keeping a close eye on how local wholesale rates are reacting to the Fed's rate hike and signals that more are to come in 2017

Today's interest rate hike by the US Federal Reserve is having a big impact on local interest rates.

The Fed raised its benchmark rate range by +25 basis points on Thursday morning to 0.50% to 0.75%. It's just the second Fed interest rate increase in 10 years.

The US central bank also signalled it will be raising rates faster in future than previously expected. The Fed plans three 2017 rises. You can read the Fed's decision and rationale here.

This is changing interest rate expectations in bond markets worldwide.

It is also changing the pricing of New Zealand wholesale interest rates, and these changes are being reflected in our swap markets.

The US Treasury yields have changed today like this:

  Yesterday
12:00am
Today
12:00 pm
Today
11:59pm
  % % %
1 year 0.87 0.92 0.90
2 years 1.17 1.27 1.27
5 years 1.91 2.04 2.09
10 years 2.47 2.57 2.59
30 years 3.13 3.18 3.15

The New Zealand wholesale swap rates have changed like this:

  as at end of
yesterday
Today at
12:00 pm
Today at
3:30 pm
End of 
Day
  % % % %
1 year 2.14 2.16 2.17 2.17
2 years 2.32 2.38 2.40 2.39
3 years 2.53 2.60 2.63 2.62
4 years 2.73 2.81 2.85 2.83
5 years 2.91 2.99 3.04 3.01
7 years 3.19 3.29 3.34 3.31
10 years 3.46 3.57 3.62 3.59

The 1-5 curve is now out to +87 bps, its steepest since May 2014. The 2-10 curve is suddenly at +122 bps, its steepest since February 2014, and close to where some analysts thought it might max out at in 2017.

If you are a borrower, you should be aware that changes of this magnitude will probably affect how banks price their fixed rate mortgage offers. By the time you come back from holiday, there is the possibility that fixed mortgage rates could be noticeably higher.

If you are an investor in a managed fund that has substantial bond holdings, like in a KiwiSaver fund, the value of your fund might get knocked around a bit as yields rise (and consequently bond prices fall).

If you are a saver, you may not see much change from the very low rates being offered for short-term deposits. But it is possible that if you are prepared to lock in a deposit for a longer term, you will be offered higher rates soon.

Daily swap rates

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Source: NZFMA
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Opening daily rate
Source: NZFMA

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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35 Comments

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is this what john key saw coming,the property clock ticking over from euphoria to anxiety,the slide in value and confidence.he would have remembered the 1994 bond crash.

Well he did say he made his mind up in September after his trip to
the USA. In early Oct Fran O'Sullivan wrote this article. Key: Interest rate spike biggest risk to NZ's economy http://www.nzherald.co.nz/fran-osullivan/news/article.cfm?a_id=13&object...

"Know when to hold 'em, know when to fold 'em"!

As a former money trader he had a keen eye for risk taking and management. My bet is with Brexit, Trump, Property & Immigration Bubble and long in the tooth National Government he knew it was time to pocket the glory and walk away from the table.

How are the cards looking Bill?

Yawn! Won't make much difference until the rates are up over 6 per cent for most people, and that isn't going to happen anytime soon if ever again!

50% increase in interest isnt going to make much of a difference?

"until the rates are up over 6 per cent for most people, and that isn't going to happen anytime soon if ever again!"

I'll take that bet.
$500 that:
- standard carded floating and fixed mortgage rates >=2 year term; offered by
- all 4 major banks (as recorded here: http://www.interest.co.nz/borrowing); will be
- greater than or equal to 6.0%; at some point in time before or as at
- 31 December 2018.

That captures most people and generously falls within the time horizon ending "ever".

If it happens I win, if it doesn't you win.
Put your money where your mouth is and see if you really are "THE MAN" - if you don't accept the bet or lose you'll also be required to change your handle too, as you'll publicly concede that you're not THE MAN. High stakes.

he is just baiting you.

We'll soon find out.

I'm serious, I like my odds.

Cmat, floating rates probably will go over 6 per cent at some stage but who,the hell stays on Floating??

Most people are fixed still in the 5s so it isn't going to make much difference unless the rates go,over 6 per cent.

The longer rates have gone up and the Banks are baiting people to fix now.

I wouldn't be fixing for over 2 years at anytime at the moment.
So you are saying they will be over 6 per cent as at 31/12/2017?

Yeah, I know most people aren't floating or going to stay floating (especially when they start seeing rates head north!), I'm saying the following:
" standard carded floating and fixed mortgage rates >=2 year term"
i.e.
- Std floating >6.0%;
- Std 2 year fixed >6.0%;
- Std 3 year fixed >6.0%;
- Std 4 year fixed >6.0%; and
- Std 5 year fixed >6.0%

For all 4 major banks
At or before 31 December 2018

I have no idea if you are right or wrong. Just a casual observer here but I love or very specific call on big bold generalistions from The Man.

Bet, Call. Bet, call. Bet, raise. ... will it be fold or call or re-raise The Man?

The silence. It is deafening.

Perhaps only dumb people have to worry about mortgage rates.

Haha, perhaps.
Perhaps, if you kind of understood how the world works, you'd understand that just because you i) don't have a mortgage; and ii) are the second-coming of Einstein doesn't necessarily mean you shouldn't worry about mortgage rates.

e.g. You have a freehold property and are rich and smart af, but your business is dependent upon consumer spending... what happens when rates go up? Normal ("dumb") people have less disposable income so they spend less on your products. Your revenue falls and so does your profit. You don't like that very much.

The "dumb people" who worry about mortgage rates also likely include people like... oh I dunno, maybe the Governor of the Federal Reserve, the RBNZ Governor, the Prime Minister, the President... all those really "dumb people" who make squillions on Wall St and run hedge funds. Those people who are a special kind of intellectually challenged.

Why do they care? Because simply i) low mortgage rates = high spending; and ii) high mortgage rates = low spending.
And when people spend they are happy, so if you're a politician in power, happy people typically vote for you. If they are unhappy, they vote for things like Brexit and Trump. Ergo the famous quote by Bill Clinton's campaign strategist - "The Economy, Stupid!"

And then we had that small episode in 2008, you may have heard "dumb people" refer to this thing called the "GFC" - yeah, so that thing.
That was when re-rating mortgage rates almost lead to the end of the world as we know it for "dumb people" but also pretty much everyone else accustomed to first world living standards.

"Dumb" logic though eh. Logic though, who needs that.

Perhaps this isn't so much about mortgage rates and "dumb" people - Perhaps (just perhaps) it's more about calling out a guy who calls himself "THE MAN" and seeing if he's big enough to stand behind his ill-informed statements / prophecies.

That is an ignorant comment Moa Man

Borrrowing money is ignorance.
Here is some commonsense.

If you can't pay for it, don't buy it.

Very few people would ever be able to afford a car like this, let alone a house.
.
but yes, for any other purchases I wholeheartedly agree. Not taking business purchases into account, of course

Best bet right now even if you have say 4.15% fixed for another 6 months would be to break that and go long at 4.75% to 5%. Apparently the banks and brokers are flat out 9 days out from Christmas with desperate people doing just that!
I think you are spot on cmat - no published rate under 6% in 12 months time but may be able to negotiate lower if you are a great customer. People should now be reviewing their rates, breaking 6 to 12 month mortgages, at no penalty and refixing for longer - perhaps at least 3 to 5 years while they can still get a sub 5% rate.

3 years fixed would be a smart move right now

There was an article on interest saying the rate banks use is currently around 6.5% when they look at future affordability. If rates rise rapidly the that rate may rise as well compounding a credit drought if incomes across society don't keep pace with rate rises.

Cmat, Silence is sometimes golden.
I normally like to only bet on things that I am pretty confident of.
No one knows for sure what is going to,happen with interest rates as it depends on what happens overseas obviously.
Donald Trump,is a loose canon so we won't know what will happen over there.
U.S. Has been tipping interest rates to rise for years and they never did so they have had to raise them since Trump got in.
My prediction is that I don't believe that rates in NZ will go over 6 per cent for say 2 year fixed as I don't believe the yanks can afford to pay a lot more than what they are currently paying as you know what happened when they were lending to anyone.
If rates did go over 6 then it is going to affect people not owning property already and will increase rents to cover extra costs.
Personally won't affect most seasoned investors and will create more opportunities as the Banks need to lend money and if no one is borrowing they will change the LVR back to what is was with the Reserve Banks support.

Great, so the short of it is that you're not confident enough to stand by the super confident statement you made previously... ("yawn!" and all)
It'll get beyond 6%, for all durations 2 year and longer, and we won't have much control over matters.

As far as what the yanks can afford, I think the Fed has the best handle on that and they are strongly indicating to the market that rate rises are ahead. Many rate rises - that is quite different to the signalling and predictions of rises in the past few years and the wholesale market has priced this in accordingly.

The swap market has swung massively in response to this (ironically, all the info to that effect is right on this very page).

Oil is up - another inflation driver in conjunction with Trump's fiscal policies. All indicators point to rising rates and the market has a roll on that expectation.... this is unlike we have seen for years.

NZ property spruikers can say what they like - you might as well be King Canute now.
- You could pass on your additional finance costs to renters, good luck with that. That's always seemed like such a veiled threat to me - if you have the capacity to raise rent then why not do it now? You're happy with the current 3.0%-4.0% gross yield? This whole idea that property investors are really real estate charity providers is such tripe - if you could put the rent up today then you would. Market factors mean you can't - tenants incomes (first and foremost), comparable housing in the area, standard of building etc.
- RBNZ lowering LVRs, well that's hopeful. The whole point of LVRs is so you have an equity buffer... an equity buffer that you stand to lose in the event the market turns. You take the risk and lose then that's on you, not the banking system and the rest of us....
- But, to labour the point - you actually think the RBNZ would lower LVRs in a falling market? Why? Their over-arching goal is financial stability. It's their reason for being. If you lower LVRs in a falling market then this puts the banks at greater risk, so is kinda counter productive. Better to retain macro-prudential lending restrictions at the current set level and let prices settle at a new equilibrium.
- And who exactly is going to be buying property in a falling market with higher servicing costs? All the people chasing capital gain will be gone, so back to the previous point - what kind of mug will want to buy a property with 3-4% gross yield and no capital gain (or worse, leveraged losses)?

No the short of it is that only a fool will make a prediction two years out and bet money on it.

Funny, in essence, that's exactly what people do when they hedge or fix. Fools.

love it so bill gross, warren buffet, George soros, carl ichan are all fools
some of the richest guys in the world who constantly makes predictions on interest rates and invest accordingly are all wrong
http://fortune.com/2016/06/09/george-soros-is-betting-big-on-disaster/
http://marketrealist.com/2016/11/carl-icahn-economy-cant-run-just-zero-i...
http://www.marketwatch.com/story/bill-gross-says-negative-interest-rates...
http://www.marketwatch.com/story/even-warren-buffett-is-confused-by-nega...

but hey lets not listen to some of the richest financial people in the world, lets listen to a small town rental house owner

I think you're confusing the words 'fool' and 'corrupt'. Regardless, keeping reading 'market watch'. It speaks volumes of your 'skill' in 'trading'.

I said 'bet' not 'hedge'. Big difference. Your proposal to 'THE MAN' was for a bet/gamble. Yes, fools.

A very educated bet.

No different to an importer hedging currency at historical highs when all fundamentals point to the US dollar strengthening. They are taking an educated punt that future rates will be lower, otherwise they would ride the spot market (which is also, implicitly, a bet).

I feel sorry for The Man, sometimes.
He just gets roasted with logic, on the daily.

Willingly throwing himself on the electric fence, day after day.

I won't disagree with that sentiment.

Nymad, don't feel sorry for "The Man" as he is "The Man".
I often feel sorry for myself coming on here and trying to offer some advice to people that don't seem to want to look at ways to improve their own circumstances.
Everyone have a good Xmas!

Cmat, not every investor is getting 3 to 4 per cent gross yields on their rentals.
Our yields in Chch are between 6 and 15 percent.
I will take you up on your bet that I personally will not be paying more than 6 per cent interest on our mortgages as at 31/12/2018 if you are keen.

Nice shift of the goalposts!

Banks have been applying stress tests on clients at 7.5% so should not be too much stress for anyone if rates stay at 7.5% or below. Could be a good time to fix for 5 years at 5%