Roger J Kerr says reversing US bond yields will push our long-term interest rates up

 By Roger J Kerr

The spate of weaker US economic data over recent weeks provided the opportunity for borrowers to take advantage of the lower long term swap interest rates driven down by US 10-year Treasury Bond yields falling to 1.60%.

The US bonds have oscillated between 1.5% and 2.0% for a number of years now with periodic global “flight to quality/safe haven” capital flows pushing the yields back down and stronger US economic data cause them to increase.

My view is that US economic data will not fall away though their summer as it has done in recent years after successive strong starts to each year.

Last Friday’s US Non-Farm Payroll increase of 165,000 new jobs in April is pointing towards improving economic numbers and thus renewed market speculation of when and how the Fed will taper-off the current QE monetary stimulus.

While the last FOMC meeting confirmed that the Fed is prepared to both increase and decrease monetary stimulus (depending on the data), the smart money appears to be favouring the US unemployment rate reaching the 6.5% target sooner than what most expect.

Increasing US bond yields over coming weeks will suggest that global fixed interest fund managers, hedge funds and US corporate borrowers will be having more confidence about an earlier Fed withdrawal of stimulus.

The direction of US bond yields over coming weeks will have a greater impact on our wholesale swap interest rates from three years onwards than any local economic data, the May budget or investor/borrower activity in New Zealand. 

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Roger J Kerr is a partner at PwC. 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