Roger J Kerr watches bond investors take a different view to currency traders over QE3 and thinks the currency traders are getting it wrong. Your view?

 By Roger J Kerr

Last week’s RBNZ monetary policy statement provided little in the way of fresh insights into the current performance and outlook for the NZ economy.

Unsurprisingly, short-term interest rates are staying lower for longer through 2013 based on the exchange rate being where it is and the TWI Index staying well above 70.0.

I still have my suspicions that the RBNZ are underestimating future activity levels in retail spending, construction, residential real estate, business investment and agricultural production over the next 12 months.

However, the international headwinds are for real with our largest trading partner, Australia in some trouble with their economy.

I do note that most of our exports to Australia are in food and beverage staples, not luxury items and thus prone to sharp demand decreases.

Irrespective of the RBNZ’s view of the NZ economy and monetary conditions going forward, the most significant development last week was the US 10-year Treasury Bond yields increasing from 1.70% to 1.87% following the Fed’s QE3 announcement.

Traders and investors in US Treasury bonds clearly taking a different view on future US growth and inflation levels than the currency markets, who sold the USD in response to QE3.

When buying my lunch today I chatted to a long-time financial markets compatriot, who reliably informed me that US bond yields also increased following QE1 and QE2.

So, borrowers looking for favourable interest rate movements from the Bernanke QE3 stimulus have been disappointed as the bond market focuses on the longer term economic consequences, not the short term euphoria the currency and equity markets have latched on to.

US 10-year Treasury bonds only fell from 2.0% to 1.4% in May/June because of global investors 'flight to safety' of exiting funds from Euroland and seeking the safe haven of US Treasuries. Now that European risk has reduced, those investor flows are unwinding, resulting in yields rising.

Local market attention will now centre on this Thursday’s GDP data for the June quarter. While consensus forecasts are for a modest +0.3% quarterly increase, following the very strong +1.1% in the March quarter, retail sales and agriculture production indicators point to a number above +0.3%.

Construction and manufacturing were also up marginally over the quarter, so it will come down to electricity, forestry, mining exploration and Government sectors’ combined performance to determine the final result. 

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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