By Roger J Kerr
The consensus view amongst the local economist fraternity and moneymarket pricing is that short-term interest rates will move across the page for the next nine months; however after that the outlook becomes considerably murkier.
The speed at which short-term interest rates increase in early 2012 will have a lot to do with how steep the interest rate yield curve becomes in the meantime.
I see the rate of increase in 2012 being particularly sharp as the interest rate markets realise that the RBNZ is too far behind the 8-ball in terms of monetary policy settings.
The steepening of the yield curve over coming months will come from US-driven long-term interest rates rising, whilst one to three year swap rates remain stable at current levels. A very steep-sloping yield curve (long term rates substantially above short-term rates) just tells you that there is inevitability about increasing short-term interest rates.
I often take my lead on where US long-term interest rates are headed from the risk management decisions of large US corporate borrowers. Currently those borrowers are issuing a stack of new corporate bonds to extend the duration of their portfolios and improve liquidity.
The better credit market conditions with investors seeking yield pick-up are attracting the corporate issuers to meet the investor demand. The US corporate borrowers also know how well their businesses are now travelling and that eventually the Federal Reserve will need to progressively remove the current monetary policy stimulus.
They are fixing their interest rates through the corporate bond issuance and fixing for long terms.
These actions tell you a lot about how they see US market interest rates moving over coming years. While the US housing market has a long way to go to restore overall economic wealth, the bond market is already starting to price the higher inflation and borrowing demand ahead.
My take is that the CFO’s and Treasurers of large US corporate borrowers are closer to what is really going on in the US economy than the Wall Street economists and Connecticut fund managers.
The corporate borrowers see US long-term interest rates higher and I don’t think they have got this wrong.
US employment data out later this week should be another strong number. After the hic-up in Japan that drove US 10-year bond yields down to 3.22%, the bond yields have already reversed to 3.44%.
We have not seen this upward move transfer through into our 10-year swap rates - yet.
The strong investor demand for NZ Government bonds last week seems to have counteracted the higher US bond yields. However, it appears to be only a matter of time before increasing US bond yields lift our 10-year swap rates back to 5.50% (currently 5.20%) and higher.
The strong historical correlation between US employment and US bond yields also suggests rising long-term interest rates.
--------------------
* 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
No chart with that title exists.
8 Comments
Accurate predictions I think.....and the unintended consequences will be!....equities will slide as pe ratios drop...bond owners will lose...buyers will win...property owners over their heads will be mart casualties...prices will fall
And on top of the rising rates will be the govt finally getting it's finger out and shrinking the state sector splurge...leading to higher unemployment and less revenue!...down we go!
Not to forget inflation is up up and away leaving Bolly looking at his belly button.
Damn I hate having to agree with Roger, In recent times he finds and recognizes the stats that talk common sense.
Funny the children came to me a couple weeks ago, buying a house, where things are going and I told them the same thing and around the same time frame too.
Time is running out...the time to find a home, sort the mortgage on current floating rates then fix long term before the 'elastic' effect swings rates up above the long term 8.3%.
When the time comes, any long term rate under 8% will be good in the long term.
I still recon the so called "long term " graphs presented are way too short.....economics are like geology/ weather trends....we usually consider (due to ego) the immediate past is all that is important to see trends , predicted the future.....Oh how so wrong.
Short term history couldnt predict the economic down turn back in 2006....but the long term 40 yrs was right on the nail....and the 200 yr certainly showed it was going to be the biggest in anyones life time.....Interest rates ar no different.
Funny how everyone Applauds Nevile, but ignore where he comes from.
Roger has got it right this time , I often disagree with his assessments , but I dont blog my disagreements or contrarian viewpoints.
Dr Bollard can only use the "unique circumstances " for a while , but the market is a hard and unrelenting taskmaster. Reality will have to be faced at some point becasue you cannot punish savers to the extent we doing are currently
Interest Rates will rise and its going to hurt borrowers all round when it happens , its just a matter of time
I too usually disagree with his opinions but agee with him this time!
Rapidly rising interest rates through 2012 / 2013 are one of several key reasons why property prices will really struggle to "edge higher" in the next few years
The evidence is clear for all to see - the market is flat even with historically low rates
I have absolutely no doubt that Roger will be right, perhaps as early as late June for the steeping curve when the Fed completes its QEII. That will take the curve unattractively higher for the likes of Westminister here, but when the bite comes for the OCR in late 2011 or early 2012, he'll have no place to run except those high long-term rates. Barring the 2009 year, the money markets have got their curves plays right everytime. ...its a brave and stupid man who keeps excepting another 2009
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.