By Roger J Kerr
Our longer term interest rates (3 years plus) continue to be held down by US Treasury Bond yields returning to below 2.5% as global geo-political events force minor safe-haven buying by investors.
However, the lower levels may not remain for long if the US bond market reacts negatively to subtle changes to the Federal Reserve’s guidance signals on how and when they transition from the end of QE in October to actually increasing short-term interest rates in March/April next year.
The Federal Reserve are trying very hard not to scare the horses in the bond market, as the last thing they want is yields racing sharply higher and thus mortgage interest rates increasing which hits consumer confidence.
If US non-farm payrolls (employment) data is strong again in June (released Friday night), Fed boss Janet Yellen will be under more pressure to adjust her forward guidance tone.
There have been a number of false-starts over recent years in terms of US long-term interest rates moving higher, however the probability appears to me to be increasing that the next push upwards in yields will be the real deal.
The annual US inflation rate is running at 2.1% therefore it is hard to see bond investors/holders being too happy with a 0.40% real return for much longer.
When the inevitable US bond market sell-off occurs, in response to an increasing Fed Funds short-term interest rate, it could be as swift and severe as the 1995 market rout (refer chart below).
Local corporate borrowers not already fixed to at least 75% of projected debt levels must be entering five to 10 year swaps at rates between 4.50% and 4.75% - they could be considerably higher in three to six months’ time.
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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
1 Comments
The Federal Reserve are trying very hard not to scare the horses in the bond market, as the last thing they want is yields racing sharply higher and thus mortgage interest rates increasing which hits consumer confidence.
Some say China is trying harder.
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