By Roger J Kerr
The domestic economic landscape may not have changed too much for interest rates over the last few weeks; however the external terrain is rocking and rolling in a way that Christchurch folk are all too familiar with.
Plunging yields on US 10-year Treasury Bonds, a plunging NZD exchange rate and aggressive 'receiving' demand in the swaps market by a US investment bank (with operations in New Zealand) have all combined to drive market swap yields sharply lower.
Perhaps the US investment bank has some advance knowledge of the Standard & Poor’s credit rating downgrade over the weekend as they were hitting the NZ swaps market hard forcing yields down during Friday our time.
Whatever the reason, provided a borrower is confident that the global economy is not heading for a double-dip recession, the sharply lower swap yields now available offer a prime opportunity to extend the maturity dates of existing swaps.
I think it is a very brave call to suggest that this credit rating decision by Standard & Poor’s in the US guarantees that the global economy will fall back into recession.
Some are questioning S&P’s arithmetic on the US fiscal/debt numbers, plus Moody’s and Fitch do not appear to agree with S & P at this point. I would read this unexpected dip in swap yields as very temporary in nature and duration. The sudden decrease in yields makes life a bit difficult for the retail banks that were increasing fixed rate mortgage interest rates a week ago.
They might be forced to reverse those increases to stay competitive.
The moneymarkets are no longer pricing-in any OCR increases over the next six months.
While the global uncertainties and risks remain so intense one can understand Alan Bollard holding back from any action that would send all the wrong signals. Therefore, monetary policy changes are held in abeyance for the meantime until the international picture is clearer.
There is no question that some of the larger investment bank players in the interest rate markets consider New Zealand and Australia as pretty much the same.
The reality is that their inflation track and thus monetary policy settings, profile and timing are often quite different to ours. However, the correlation between their three-year swap rates and our three-year swap rates is reasonably close despite monetary policy management being out of synch over the last two years.
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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. This column was written before the Monday quake. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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2 Comments
Bollard gets it right this time. I seems laughable that just a few weeks ago the big trading banks were making self serving noises about interest rates going up and that mortagage holders would be wise to fix ( at a higher rate) so as to not miss out (on providing a larger margin for the bank of course). With the trillions of $ sovereign debt much of the world is saddled with, the only options are : 1. A cascade of sovereign default with bond holders taking a massive haircut. 2. Or sustained low interest rates for decades to enable the debt to be serviced ala the Japanese solution. It looks as if deflation is the only game with tickets available. I wouldn't be surprised if their was a race back to 0% internationally over the next 12 months, in a financial arms race. True negative interest rates would make things interesting, I mean where interest is paid for money to be held in account.
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