By Roger J Kerr
Everyman and his dog keeps telling us that NZ interest rates are at record historical lows and will stay there for some time yet as the global economy is not recovering and has major problems.
What if that very negative view on the global economy is wrong?
For sure Europe has fundamental problems that will not be solved overnight; however there does appear to be more of an understanding and resolve from their leaders to address the issues head-on now.
I remain optimistic that the US economic recovery will find new impetus again after the weak data of the last three months.
The reduction in their natural gas energy prices from fracking shale gas is a major boost for their economy and this positive should not be underestimated.
Should the Federal Reserve do QE3 monetary loosening (I don’t think they will), the unintended consequences will be unacceptable - that is, US bond yields increasing as funds are switched out of low returning 1.5% bonds in favour of skyrocketing equities.
US bond yields are at 1.5% because investors worry about Europe imploding and they put their money into the safe-haven of US Treasury bonds.
As European risks subside from the extremes of recent months, those flows into US bonds will reduce.
Picking the bottom in the US bond yields (hence our long-term swap rates) has not been easy to date, however the probabilities are stacking up that we may have seen the ultimate lows at 1.40% last week.
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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
7 Comments
"in favour of skyrocketing equities."
The S&P 500 is currently below what it was in the year 2000. So if QE 1 & 2 failed to get it higher then, even if there is a QE 3, it will most probably ony cause a temporary uptick, followed by the next leg down in the market.
Picking the bottom in the US bond yields (hence our long-term swap rates) has not been easy to date, however the probabilities are stacking up that we may have seen the ultimate lows at 1.40% last week.
I bet it hasn't. You seem not to be overburdened with nimble trading talent.
And yet you doggedly ignore the possibilty of US T10 pricing negative yields similar to some issues in Germany and Switzerland already priced there.
As I noted there can be expensive errors and you would be wise to refrain from such adamant advice unless you simultaneously offer comprehensive principal protection hedging strategies.
Negotiating professionally dominated fixed income markets is hard at any time - but when quick draw loss limiting juniors are in charge while their bosses swan around the Med for the month of August, I would defer all new investment activity in bonds until calmer, wiser heads arrive back in early September.
"What if that very negative view on the global economy is wrong?".....hmmmmm....what if it is not....what if the very negative view is an understatement of the serious trouble to come....!
Roger has this to say..."As European risks subside from the extremes of recent months, those flows into US bonds will reduce"....is Roger in his very own Fairyland...the situation in Europe is set to explode and the potential for the US bond market is one of utter disaster when rates rise as they will.
How many hundreds of billions are set to be wiped off the value of those bonds.....!
Wolly - I strongly suspect you're wrong about Europe...maybe in the longer-term, but not the next 12 months plus some. Its pretty clear that the ECB has a grand plan finally....once/if the German courts validate that the ESM is within the German constitution on 12th Sept, get the problem children to formally request a bail-out (they will or otherwise their bond yields will become Greek like) then get the ESM (possible with huge added firepower if they can get the Germans to agree to giving it a banking licence) to buy tons of Spanish and Italian bonds, and the ECB buys unlimited amounts on massive, and possibly unsterlied QE basis. I reckon, 70% plus chance of that before Christmas, probably Sept/Oct.
Bond yields in those countries will collapse, and the yields in those countries such as NZ/Aust & the US (although the Fed will fight to hold them down) will rise substantially - 50 -100 basis points by Christmas here.
How long that impact will last will depend upon the long-term budget reduction measures that come with the bail-out condiitons, how well balanced they are that doesn't completely kill growth, and how well they're enacted, The long-term I have far less faith in.
And good luck to you on that Grant A...
The ECB may well get the go ahead to debase the Euro to bail out the piigs to protect the German bank balance sheets..more than they already have!
Consider the owners of bonds...those foolish enough not to have got out early on...they will be repaid in used toilet paper...those with a fist full of Euro will have a fist full of dunny tissue.
Much the same future shock awaits those who have rushed into US govt bonds...only the inflation proofed flavour will escape the slaughter...
And the billions lost will mean what....surely a massive Domino collapse of banks and those that gambled on the wrong side of the game...indeed even the winners may discover they will not be paid.
One thing you can count on with 100% certainty...govts will steal from taxpayers to bail out banking scum...all in the name of protecting economies of course.
Wolly, don't mistake me as someone who thinks that bonds are a good investment, they are a massive bubble waiting to burst. All I am saying is that, is the case of the PIIGS, they're about to get a temporary reprieve, but as I said, longer-term you don't want to own them, and even moreso, US bonds
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