By Roger J Kerr
Market pricing and the RBNZ's Monetary Policy Statement last week effectively set out the timing and extent of interest rate increases next year.
Something would have to go seriously wrong with the economy or currency value to get substantially different outcomes to what is currently being signalled.
The wildcard for interest rate movements is going to come from the US bond market were the future is less predictable.
My reading is that the US bond market is just waiting for the next wave of selling to take the 10-year Treasury yield to above 3.00% again.
US fund managers and large borrowers have been positioning to expect material increases in yields in 2014 and I do not think the markets will disappoint in this respect.
The selling of bonds is not expected to be as severe as the mid-1990's rout, however another 1% increase to 4% is more likely than any other scenario.
Interest rate increases in 2014 will be more effective in slowing rampant consumer demand in the NZ economy than the ineffective OCR hikes in 2008 due to the lower and shorter levels of mortgage fixing this time round.
Therefore 90-day rates should even out around the 4.5% to 5.0% in 2015.
Corporate borrowers fixing via swaps may find that five year plus swaps above 5% may not prove to be very economic hedges against this scenario.
Rising US bond yields is likely to coincide with a stronger US dollar exchange rate in 2014 as momentary stimulus is unwound by the Fed from January on.
A resultant lower NZD/USD rate to the 0.7700 area will certainly provide the window for the RBNZ to lift the OCR without crucifying the export sector in doing so.
Have a great Christmas!
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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
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