By Roger J Kerr
While our short-term interest rates are determined by RBNZ monetary policy settings based on the inflation/growth outlook, our long-term interest rates (swaps rates beyond three years) are largely driven by global bond markets.
That is, swap interest rates track NZ bond yields, which follow US and Australian bond yield direction.
In many ways our longer term interest rates behave like exchange rates in that they are relative prices.
If global bond investors prefer one country’s government bonds over another they will buy the preferred bonds (driving the yield down and bond price upwards) and sell the less preferred bond (yield up, bond price down).
So, NZ bond and swap interest rates will move relative to the market movements over other bond markets.
Over the past six months, fixed interest fund managers and sovereign wealth funds have been divesting European government and corporate bonds as they continue to go down in value and have been seeking alternative government bonds to invest into.
New Zealand and Australian bond markets have benefitted from this relativity change, perhaps artificially holding our long-term interest rates lower than where they would otherwise be given the increased Government bond issuance and inflation/growth outlooks (see chart below).
The question is will global investors continue to buy our bonds when they have finished with their selling of European bonds?
I suspect so, however the latest credit rating downgrade news out of Europe does not suggest this is going to happen anytime soon.
The equally important driver of long-term interest rate direction is local investor demand and borrower supply of debt/bonds onto the market. Local fixed interest fund managers (who were not short of portfolio benchmark duration) produced some pretty impressive returns last year as markets yields declined.
My expectation this year is that these fixed interest managers will now position their portfolio risk from the short-side of benchmark duration - that is, shorten their duration by being sellers of longer-dated securities, not buyers.
They will also be wary of the European financial problems increasing credit spreads across the board, another reason not to be a buyer of long-dated securities.
On the other side of the market, we can expect to see the NZ Government and corporate borrowers issuing as long as they can. All this adds up to higher market swap yields from here rather than a continuation of 2011 decreases.
Short-term interest rates over coming months will oscillate on the prospects of NZ achieving 3% GDP growth in 2012 or not.
My continued view is that the European recession/crisis does not drag the US and Asian economies down and thus our economy has great conditions for strong growth with high export commodity prices and low interest rates. Since the last week of December the moneymarkets have removed the pricing-in of cuts to the OCR in 2012. Current pricing is for no change at all in 2012.
However, as the year unfolds I expect a stronger than expected economic data to progressively change that benign outlook.
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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. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
18 Comments
Agree. NZ and OZ property has HAD IT- it's over- as much as interest rates influence price, how about the access to the funding? As world bond bonds seize, do you think that banks on the other side of the planet really care about what happens to the cash flow on your real estate portfolio?
Where are all the spruikers that AREN'T Olly posting under a different name?
Roger for Petes sake...you know the game is rigged...let it go...give it a break...sit back and enjoy the show...Bollard's rolling the dice and he owns the dice so you ought to know what the result will be...
The rest of us have decided to let him have his way...we just stopped spending and stopped borrowing and stopped paying tax and stopped worrying too.
Pretty soon the only growth taking place will be in the level of fear and panic as Bill's revenue shrinks to nout and the export prices head back down the slope of BS....End of the rural revival for sure...the smart famers have been stashing the booty cos they know what's coming their way.
Europe is heading for the final act....any day now...wanna buy some shares in a piigs bank Roger...think of the excitement you could have.....or maybe some piigs bonds just to add the fizz to the party Roger!
Wow, that comment is amazingly fluffy headed for you Wolly. First Bollard is rigging the system and indebting people, and then everybody stopped spending and stopped borrowing. But isn't debt repayment a reduction on dependency on the NZ financial system, and transatively the RBNZ? How is Bollard achieving this evil act? Some kind of propaganda maybe? Massive brainwashing? Or was it all part of a secret plan starting in mid 2003 when Bollard decided to inflate a housing bubble (by raising interest rates by 0.25% more than was correct) just so he could bankrupt the NZ economy.
"Fluffy"....it's the brain Nic...It's overloaded with the BS and spin about recovery in our time and so on....
Bollard is out to pork activity by trying to keep the cost of credit low and he is allowing the banks to run up the LVR ladder of greater risk once again...
The debt repayment is not taking place. Debts are being rolled over with new credit...and billions in extra credit are being borrowed....meanwhile households are as bloated on debt as they were...no real repayment/ debt reduction has taken place since 07...no change....massive risks remain.
Meanwhile the public have stopped spending...so the govt revenue side is shrinking...at a time when splurging is expanding...goodbye to the BS about fiscal surplus...
We are rapidly chasing to catch up with the piigs...not long now...soon as the China dream pear shape is recognised the commodity prices will drop away...that'll be goodbye NZ economy...just ask English...oh, he's on holiday...sorry....we are stuffed.
Good, so you have identified something we can look into, is the average debt being rolled over or increased or decreased. Though you said debts were being repaid in your last post, not rolled over. I expect that they are being re-paid, as statistics show would be similar to Australia and the US.
Here is a key chart from the Reserve bank of NZ,
http://www.rbnz.govt.nz/keygraphs/fig5.html
So in fact average debt peaked at a co-incidental time around 2008 and has since been flat or dropping (about 10% from peak so far). You want to challenge that, I am sure that the non-income adjusted figures could be found.
I am also going to suggest that consumption has dropped because people are using their 'consumption money' to repay debt.
Care to comment on how Bollard is causing that? I would have expected people could afford more debt at a lower interest rate. Maybe you should just claim the RBNZ just makes up the numbers thats probably a more creditable answer.
Ones mans flat is anothers drop of 10%...Bollard is not causing the drop in spending..that's a result of people running out of cash and using up all their credit options...but he is trying to prevent it happening by keeping the credit cheap as he can...by his own words..."to stimulate the market"
Debt is being rolled over and govt is borrowing new debt on top...while the public property debt levels and the rural debt levels remain where they were. At dangerous levels.
"you said debts were being repaid in your last post"....! did I? I've just had a look back and NO I did not post that...
To repeat for Nic...debt levels brought a downgrade...public corporate rural debts remain high..meanwhile govt/state debt has exploded higher...we are racing to catch the piigs...only the rural commodities export bonanza c/- Ben's QE games are keeping us afloat.
Evidence out there...banks are upping their LVR % back to bubble activity times with the ok from Alan Bollard...Kiwibank is leveraged to dangerous levels...all ok by English...property remains the game in town...Bollard's cheaper for longer is holding down the floating rates..porking activity like there is no tomorrow.
So what is Bollard responsible for? I am pretty sure the financial crisis started in the US and spread from there. Dr Bollards policy is clearly a reaction to that, and of course he is trying to "stimulate the market", this has certainly reduced the size of the correction (a.k.a the financial crisis caused by now prevalent repayment of debt) which would be even more visible if base interest rates were at pre 2007 levels. Well you certainly can't criticise this policy for being overly effective, basically its been in-effective in re-inflating the bubble.
Also it should be clear that if more debt is not being taken on then repayments will mean that the aggregate debt is decreasing. I assumed you were making this trivial connection, by the statement 'stopped borrowing'.
Also to point out if the consumer spending prior to 2007/2008 was dependent on increasing debt aggregate then just leveling out of the debt aggregate would represent a massive drop in consumer spending. The mechanism is maybe a little more obvious if you think about debt repayment, essentially if you are repaying debt then this money leaves your deposit account and so you have to stop spending it.
The 10% decrease (scale to the left of the graph) is obvious enough, though a fairly recent development. This is however more obvious in the US statistics. The credit downgrade happened long after the recession was apparent in NZ. So just to point out the mechanism I am trying to highlight. Bank borrowing creates extra purchasing power and increases demand, repayment destroys purchasing power and decreases demand. This has nothing to do with Bollard really, because he has to operate inside NZs financial policy system.
What was Bollard responsible for?
He was responsible for (participated in the formulation of) the NZ Government Retail Deposit Guarantee Scheme which was different to any other Central Bank in the world in that it covered Finance Companies which in turn has incurred a $2 billion loss. By comparison Ben Bernancke was responsible for the US TARP bailout package that has resulted in a USD $75 billion profit return to the US Treasury
Really because Wolly seems to be implying he is the evil mastermind behind some plan destroying the economy. As far as the finance companies goes you can hardly blame him for this, there was pleanty of scope for the opposition to challenge the plan, or the government to change it or not to make it law. Actually as I understand it the scheme was still open to some interpretation at the time of application, and the government was always able to drive a harder bargain when it was selling any institutions it had aquired.
BTW, the TARP funds were unlikely to have been paid back if the FED had not bought hundreds of billions of dollars in dodgy securities from various banks. In most cases it was probably morally dubious to exonerate financial institutions from the crisis and to burden the tax payer with a debt, at minimum without following up with significant financial reforms. One could hardly expect much better however given the central banks role is basically to back-stop financial institutions and given the obvious level of captivity of the FED to its members.
Wolly: Keynesian stuff advocates the idea that Government should salt away some firepower during the good times, and dig it out and splash it around during the bad times. ie spending what it has saved. No borrowing. But of course if Govt hasn't done the rainy day thing, then you are absolutely correct.
Not exactly, the best policy would be a move to a stable financial system without this mechanism of debt driven demand (and the exacerbated bubbles it causes). I think a change to a full reserve banking would do this. It would eliminate the financial system driven cycle of inflation, leaving only any inflation caused by government spending (which has been more subdued). This would be followed by some (now necessary) government spending to reform the economy and eventual stability (in the absense of any external shocks).
If this is too much to ask then the last great depression was recovered from through big government stimulus and so of course government debt. It would probably be more fair for the government not to borrow stimulus money though, instead creating and spending it without an associated debt. The austerity in Ireland and Greece is clearly not working precisely because its pro-cyclical monetary policy.
At minimum at present the NZ financial system should be following policies to reduce its dependency on overseas borrowing, because thats what causes financial crisis to spread from Europe and the US to NZ.
In general I am in favour of democratising financial reforms such as borrowing from within your economy, or deposit holders retaining ownership over their bank deposits.
There was government spending before the great depression. But the scale was different and significantly so. The more popular policies have experienced longevity in the US. I think if a program is popular with a majority it is legitimate use of tax money. Though the representative system tends to conflate what is popular with who is popular.
I am debt free (freehold house) and have cash, not all in a bank either to hedge my bets.
I cannot lose whatever happens, can I? In 5 years we will still trade in NZD and go overseas for holidays etc. What is happening now is going to be painful if you owe loot, but for the non debted people life will be ok, although I expect jobs will be hard to come by for some time. If Bill's revenues satrt to fall then cut costs.
I just hope NZ INC don't listen to the whingers & trap our country into a deep hole. We should start investing in mining/oil recovery among other things to help us along and bugger what the likes of Greens say. This can safely be incorporated into the mix of dairy/tourism/niche manufacturing we already have.
People like yourself will be made the scapegoat via new taxes to help bail out the MASS indebted who can't face personal responsibilities. Why? cause that is where the politicians get their numbers for election time! The useless sods who can't manage their own lives properly.
In fact it is already happening and has been for years via the RBNZ trying desperately not to pop their own property bubble to save those Aussie banks from a disaster. The blatant manipulation of the NZD, OCR, the CPI, and the true inflationary rate all aimed at propping up the mass indebted at the expense of people like yourself who lived within your means and did the right things
The difference between the US derpression and the Weirmar Depression was that the US had hard money (gold standard) and the Germans had soft money (fiat currency). In the US cash was King because cash was gold. In the Weirmar Republic cash was trash, because government could create more and more of it. Gold went up in both depressions, relative to every other asset class, German stocks were soaring, but were crashing when measured in USD/gold.
It's worth considering, other safe places to keep your cash. It will be the difference between not even breaking even, and getting ahead.
Once this whole storm blows over, what will gold be worth, and what will cash be worth?
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