A review of things you need to know before you go home on Tuesday; a new low mortgage rate, Fonterra chided, leverage not improving, car sales high, commodity prices up, swaps rates slip, NZD firm, & more

A review of things you need to know before you go home on Tuesday; a new low mortgage rate, Fonterra chided, leverage not improving, car sales high, commodity prices up, swaps rates slip, NZD firm, & more

Here are the key things you need to know before you leave work today.

HSBC ended most of its low Premier specials, except its two year fixed offer which it cut dramatically to 3.69%, the lowest bank mortgage rate ever.

No changes to report today.

The sales rates ranged from 21% to 47% at major Auckland realtor Barfoot & Thompson's main auctions last week. Overall just on a third of those auctioned were sold under the hammer, a success rate similar to most weeks in the past three or four months. Activity post auction pushes that up to nearer 50% (presumably after vendors get to ponder the new state of the market).

Ratings agency Fitch says Fonterra has structural issues it needs to address. It wants Fonterra to prioritise the strength of its balance sheet over payments to farmer shareholders. Meanwhile Mike Hurrell got the Fonterra CEO job permanently.

For the first time ever, the eleven active retail banks in New Zealand reported assets exceeding $½ tln as at December 2018. Ninety percent of these are in the books of the four big Aussie banks. This data is in our updated Bank Leverage page and it shows that leverage levels remain little changed, and returns on shareholder equity are at a high average of 13.6% after tax, and higher at most Aussie-owned banks.

February car sales remained at high levels. And this is despite a drought of rental car sales in the month. The contrast with house sales is somewhat surprising. SUV sales were slightly lower than usual, except for the small luxury category. 7,580 cars were sold in the month, a +2% gain above the same month a year ago. In fact it is only the second month in the past six where a year-on-year rise has been recorded, all the more impressive given the low sales to rental car companies. Sales of commercial vehicles stayed high, but were unchanged from February 2018. (In Australia, lower house sales are being blamed for declining car sales there.)

The ANZ World Commodity Price Index pushed up 2.8% m/m in February, continuing the upward shift that commenced in January. Positive price movements were recorded for most sectors but the +6.6% lift in dairy prices was the main driver.

In Australia, a $120 mln residential mortgage bond made up of Suncorp mortgages suffered defaults to a trigger level where investors may not get all their money back. It is being described as a 'canary' moment. But only time will tell. However, it is probably the first ever such event across all RMBS in Australia.

Asian equity markets are all down today, falling by about the same as Wall Street in early trading. Australia and New Zealand are lower too. Most of these falls are around about -½% on the day.

Local swap rates are also lower today, with the 2 year down -1 bp, the five year a bit more, and the ten year down -2 bps. The UST 10yr yield is little-changed at 2.73%. Their 2-10 curve is slightly lower at +18 bps while their 1-5 curve remains barely inverted at -1 bp. The Aussie Govt 10yr is up +2 bps to 2.17%, the China Govt 10yr is up +3 bps to 3.24%, while the NZ Govt 10 yr is down -1 bp so far today to 2.20%. The 90 day bank bill rate is up to 1.91%.

The bitcoin price is down to US$3,705, a fall of -2.6% today.

The NZD has firmed slightly to 68.2 USc. And we are even firmer against the Aussie at 96.3 AUc, but little-changed at 60.1 euro cents. That puts the TWI-5 up at 72.8.

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Monetary policy is not made by moving interest rates. Do you think lowering rates stimulates the economy and raising rates slows it? Think again. Empirical evidence on how interest rates & growth are actually related:

Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth.

If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.

Well, well.

That's rather interesting.

Does intuitively make sense, I guess, in light of what we've seen. All we're getting from low interest rates is asset bubbles without great growth, and zombie companies supported in their insipid existence rather than falling over in a market requiring survival of the fittest. Perhaps we're far better off having lower asset prices and money chasing return from far fitter productive enterprises.

Why be productive when you can just leech from those who are productive via housing?

Mortgage backed securities, I surprised we are doing those again. I remember seeing this movie, it’s called the Big Short, about how they brought about financial Armageddon about 12 years ago /s.

Prices have only dropped 14% in Sydney and they are leading the correction (some parallels with Auckland leading NZ’s decline). If they are already taking a capital loss at this point that is very scary for if prices drop 20%, 25%, 30%. Who is exposed to MBS in Australia and New Zealand?

Ah that’ll be most depositors I assume? At many multiples too.

The credit and structuring standards are very strong with the AAA notes having considerable credit enhancement. There is no record of a AAA default in an RMBS in UK/NZ/Aust. The Big Short was the US subprime where there was wide scale fraud and $b fines for the arrangers.

Really? The original offer documentation for this Suncorp tranche shows 980 million in AAA debt (made up of 630 million highest class, then 300 million next class, then 50 million next class, all three of these classes rated AAA) and just 20 million of AA- debt. Today they aren't paying interest (only the bottom class isn't receiving interest) but do claim to be able to pay capital. 20 million of chargeoffs will wipeout the non-AAA notes, and make a default on AAA notes likely. Not much room for error in a falling property market.

I would have thought post GFC MBS would be built to survive 40%+ falls in house prices. Now we are at less than 14% and they are already at risk.

I guess I shouldn’t be surprised. 10% deposit mortgages, interest only, and that equity actually being recycled won’t survive a big fall. This is why we need LVRs and DTIs, to save banks from themselves.

The banks have protected themselves. I'm sure it wasn't the lowest risk mortages bundled into this security. We'll see what Te Kooti can add after he's had a nice cool swig of Kool-Aid.

We must be looking at diffeent Suncorp 2010-1 RMBS. It has already repaid principle to most (if not all AAA) notes and there is only 12% of the original issue outstanding. Once at 10%, Suncorp will clean the issue up by repaying all outstanding notes, The trigger breached meant the notes went into sequential paydown (from pro-rata). You know these notes ammortise right?

Good points, thumbs up. Obviously this last 12% of the original capital will represent the slowest repayers, and the repayers most likely to be in default. Suncorp presumably know they will have a hard time regaining their own 10% from those borrowers, and will looking at how to maximise their own recovery once the repayment threshold is reached. In the bigger picture it's not so much this particular note, but what it implies for other notes which haven't been around for nearly as long. I'd be extremely cautious about any 2015-2018 Australian issue for which perhaps 60-90% of the original capital value is still outstanding for example.

I've spent more time trawling through the offer documents. Suncorp has the option of repaying all notes when outstanding balance reaches 10%, but at their own discretion. 12% of the issue outstanding is approximately 120 million, likely the class A1 tranche is fully repaid, but based on likely repayments of capital to other tranches per the conditions, the 12% (120 million) outstanding is probably well over 90% from tranches (originally at least) rated AAA. This doesn't bode well for similar AAA tranches from around 2015-2018 if the downturn in Australian property prices continues.

They will almost certainly clean it up at 10%. Suncorp will hold the equity piece as it generaly a regulatory requirement. Other investors will hold the mezanine piece. There are other credit enhancements like excess spread built up over the years (the mortgages pay more interest than the notes to investors), also the loan to value will be around 40%. So before a single $ is lost by AAA, houses prices have to fall 40%, plus there will be another 25% of enhancement and everyone has to simultaneously default. I will cede you this, if capital losses are incurred by prime AAA RMBS, then the doom merchants were right.

To give you some insight as to how strong the structural credit enhancements are on prime RMBS, all the notes in the Northern Rock RMBS SPV repaid in full. The AAA's traded down to 25-30 cents in the dollar but repaid at par ($1). Serious money was made by those who kept cool heads and did the math's.

Probably most Kiwisaver and similar funds. Insurance companies at the more protected end of tranches. Some banks selling these securities to Kiwisaver and similar funds run by their own bank.

Interesting aside, workmate put a tender in today on a mortgagee sale of some rural land northwest of Auckland.. Turns out it was put into mortgagee proceedings by the holder of the THIRD mortgage..

I knew there was the occasional second mortgage out there, but third mortgages???

Those car sales should suggest bouyant consumer spending. The wealth effect is alive and well.

Deflationary Red Alert: Chinese Car Dealers Are Slashing Prices, And It's Not Helping

and how often has zerohedge been right? ie I gave up years ago paying them any attention.

actually that was a link from a Bloomberg article, Zerohedge are an accumulation site with some dodgy stuff but some good stuff too.


Fair enough.......I do think the entire system is highly unstable and increasingly so, but its ability to hang together is surprising.

This is why things will get very difficult.



We have a generation of young people who will not be voting like their parents.

They are worried in Aus, and Auckland gets a mention

Speaking of canaries – in the early days no one really joined the dots of what became the GFC:

"Phase one on 9 August 2007 began with the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt."

Just a few months earlier:

"London – BNP Paribas is delighted to announce that it has been named ‘Equity Derivatives House of the Year’ in Risk magazine’s 2007 awards, which recognise innovation and excellence in derivatives and risk management."