March / April 2011
- With New Zealand just starting to come to terms with the economic impact of the Christchurch earthquake, markets then had to refocus on the news that Japan had experienced its strongest earthquake in at least a century. Initial market reaction saw 'risk aversion' prevail with 10 year US Treasuries rallying over 25bps as news filtered through of possible radiation leaks from their nuclear plant in Fukushima.
- The disaster in Japan somewhat overshadowed the announcement by the RBNZ that they were lowering the OCR rate by 50bps from 3.00% to 2.50%. Whilst this announcement was not totally unexpected, the market had not fully priced this move in the short end and a subsequent rally followed. Governor Bollard cited that any beginnings of an economic recovery in 2011 had been offset by the Christchurch earthquake and that any future monetary policy adjustments would be guided by emerging economic data. Bollard reiterated that they had acted 'pre-emptively in reducing the OCR to lessen the economic impact of the earthquake and guard against the risk of this impact becoming especially severe'.
Rate 31 Mar 28 Feb MOM Change
1yr 2.74% 2.94% -0.20%
2yr 3.28% 3.38% -0.10%
3yr 3.80% 3.80% 0.00%
4yr 4.16% 4.12% 0.04%
5yr 4.46% 4.39% 0.07%
7yr 4.88% 4.79% 0.09%
10yr 5.28% 5.18% 0.10%
- With the RBNZ expecting the current monetary policy accommodation to be removed once the rebuilding phase materializes the market has now moved to the OCR being on hold for the remainder if 2011 and effectively only a 25bps move in January 2012.
- In March we saw Dunedin City Treasury, Solid Energy and Auckland Council announce that they were coming to market with local wholesale issues.
- The lack of any retail new issuance remains and this current lack of supply looks unlikely to change in the short to medium term. The exception to this is the bond issuance offered by Genesis Energy which opens on the 15th of April (see our review under Latest Bond recommendations)
- It would be difficult to see any further rally develop in short end swap rates due to where we now sit in the interest rate cycle and we continue to believe that bond yields locally will remain at increasingly tight levels until we see some of the retail supply addressed.
- Strategically we see no value in long bonds given their yield relative to short term deposit rates and continue to recommend that investors adopt a short term duration to their portfolio. Frustrating as it is, we remain adamant that this is the correct strategy and that patience will eventually be rewarded once interest rates rise. Fixed interest investors who adopt a more pro-active approach to their portfolios should be continuing to reduce exposure to long bonds at current levels.
February / March 2011
- This strategy piece marks a substantial change in our view based on the events of last week in Christchurch. There is no doubt that the Christchurch earthquake will have a dramatic impact on the economy and perhaps on business confidence in general. We expect that the negative economic effects could last for a considerable period of time and have a material impact on underlying GDP growth over the remainder of 2011.
- In New Zealand, post the earthquake, short term wholesale interest rates have moved substantially lower with the 90 day bank bill now trading at below 3% (2.88% at the time of writing). This assumes that the Reserve Bank of New Zealand will now look to reduce the Official Cash Rate by at least 25 basis points. The market also does not expect any further tightening now until 2012. The table below illustrates the move in New Zealand interest rates over the past month. Whilst the short end of the yield curve has been influenced by local events, the longer end has also seen a dramatic rally based on rising tensions in the middle east. The US 10 year bond for example has rallied from 3.71% at the start of February to 3.41% at the end. Notwithstanding these moves we have seen a heightened steepening of our yield curve with rates now significantly higher at the longer end.
Rate 28 Feb 31 Jan MOM Change
1yr 2.94% 3.42% -0.48%
2yr 3.38% 3.84% -0.46%
3yr 3.80% 4.17% -0.37%
4yr 4.12% 4.41% -0.29%
5yr 4.39% 4.62% -0.23%
7yr 4.79% 4.97% -0.18%
10yr 5.18% 5.34% -0.16%
One thing that has remained the same over the month has been the high degree of illiquidity in the secondary market for New Zealand corporate bonds. With only Rabobank, Watercare Services and ANZ National offering wholesale issues over the month, the retail market's appetite remains unfulfilled. We are still awaiting further information on Genesis Energy's potential issuance.
There is no doubt that at present the retail bank deposit market remains the best option for investors who don't require liquidity. We recommend that investors focus on periods of up to 12 months where the major banks are still offering rates of up to 5.55% (Rabodirect). Investors requiring a shorter duration can achieve up to 5.35% (again Rabodirect) for 6 month money. To achieve similar yields in corporate bonds on a security offering a similar credit rating, one must look to invest in a bond that has a 5 year plus maturity. We believe that unless an investor is specifically seeking a hedge against potentially lower rates in the future, it makes little sense to lock in for that term. It is important to note that our longer term view regarding interest rates remains unchanged and that eventually we envisage seeing dramatically higher yields.
January / February 2011
- Local markets were again affected by offshore interest rate movements which in turn were swayed by events including the Chinese trying to fight inflationary pressures; Australia experiencing some of the worst flooding for decades; European peripheral debt problems continuing to exist; and better economic data continuing to emerge out of America.
- In New Zealand our interest rate curve actually saw longer term yields move lower despite a contary move offshore after local economic data suggested that the Reserve Bank is likely to delay any rise in the official cash rate until later in 2011.
Rate 31 Jan 31 Dec MOM Change
1yr 3.42% 3.39% 0.03%
2yr 3.84% 3.80% 0.04%
3yr 4.17% 4.18% -0.01%
4yr 4.41% 4.47% -0.06%
5yr 4.62% 4.73% -0.11%
7yr 4.97% 5.11% -0.14%
10yr 5.34% 5.53% -0.19%
Due to the holiday period it was a quiet month on the new issue front with just Infratil announcing that they would make a further offer of Infrastructure bonds maturing in June 2017 with a fixed rate of 8.50%.
Fletcher Building also announced that they were offering rollover terms to existing holders of their March 2011 bonds. These bonds will have a maturity of March 2017 and a rate of 7.50%.
We maintain that especially with the rally in yields of lower quality debt it is NOT the time to be increasing exposure to unrated subordinated securities.
The liquidity in secondary market debt continues to be tight as the demand outstrips supply. We see very little value in secondary market debt at present with our preference to remain in shorter term securities. We maintain that the pick up in yield of rated secondary market debt is not sufficient in relation to shorter term bank deposits. Consequently we continue to recommend patience and a focus on 6 month term deposits.
December 2010
As we have been warning for a number of months now, longer term interest rates moved substantially higher over the period as local markets were dominated by offshore events. This included the US Federal Reserve announcing another round of quantitative easing (QE2); the European peripheral sovereign debt problems well and truly escalating with Ireland agreeing to a bailout package and; the Reserve Bank of Australia hiking their cash rate by 25bps to 4.75%.
Short term interest rates remained fairly steady and it appears the market is now factoring in a slim chance that the Reserve Bank of New Zealand will increase the cash rate early in 2011. Notwithstanding, competition for deposit funds remains fierce with Rabdirect leading the charge in relation to retail deposit rates.
The moves above seem to further reinforce the view that we have seen the bottom in rates for this cycle, however, with the market now appearing to believe that the RBNZ may now be on hold until June rather than the previous consensus for a March 2011 25bps hike, it would appear less likely that we will see a material move higher in shorter term swap yields from current levels over the next quarter. Equally it would appear reasonable that given the sell off in longer term yields over the past three months, we may well see some rally in longer term yields during December.
It was a relatively quiet month on the new issue front with the early part of November dominated by the two Australasian corporates which were tapping the local NZD market.
The offer period for the Goodman Fielder New Zealand Limited May 2016s closed on the 17th November with the coupon fixing at 7.54% which was 280bps over mid swaps. Meanwhile, by mid month the books had closed for the APN Media (NZ) Limited March 2016s as the company announced that they were issuing NZD100m at a rate to be determined on 14th December 2010 – this being the higher of 7.80% or mid swaps plus 310bps (current market swap rates imply this to be 7.90%).
Infratil Limited also announced that they were making a dual offering of capital notes to (i) new money and (ii) holders of their May 2011 bonds. This will have a maturity of June 2016 and a rate of 8.50%. The company were accepting applications for up to NZD50mio of new money but had the ability to accept oversubscriptions for a further NZD25mio.
Looking forward to the first quarter of next year there is a fair probability that the size of the local primary retail market may continue to contract as many of the local borrowers who had previously tapped the NZD market in recent years have instead ventured offshore where the US private placement market continues to show considerable demand for the better quality New Zealand borrowers. This was well illustrated by Auckland International Airport announcing mid month that they were issuing three USD50mio tranches with a 10 year and 12 year to be drawn down in February next year and a further 10 year to be drawn in July 2011.
Our investment strategy remains unchanged this month. Despite the likelihood that there will be little new quality issuance going into next year which could well underpin existing quality secondary market yields, our view remains that there is medium term risk to further interest rate rises. Consequently we would suggest that investors continue to stay short term (6 – 12 months) but if considering longer term debt to focus on quality rated securities. Furthermore we believe investors should ensure that these longer dated holdings are not solely sponsored in the secondary market by retail investors but instead are also likely to find support from institutional investors. As we have seen before when bonds are solely retail driven the price action can be very volatile due to liquidity constraints.
November 2010
Rate 1-Nov 30-Sep MoM Change
3m 3.19% 3.19% 0.00%
6m 3.29% 3.23% 0.06%
1yr 3.52% 3.39% 0.13%
2yr 3.93% 3.69% 0.25%
3yr 4.18% 3.91% 0.28%
4yr 4.37% 4.08% 0.29%
5yr 4.55% 4.25% 0.31%
7yr 4.86% 4.53% 0.33%
10yr 5.18% 4.83% 0.35%
Primary issuance in October was dominated by two unrated Australasian corporates with both Goodman Fielder New Zealand Limited and APN Media (NZ) Limited announcing NZD denominated bond offers. The other public primary bond issue was ASB Bank's 5 year fixed rate senior bond which came at a spread to swaps of 1.75%. Some rated NZ corporates have continued to acquire funds offshore at significantly lower rates than what they would have to pay in New Zealand.
With swap rates rising during the course of the month, credit spreads for many of the securities in the New Zealand debt market actually contracted. This is a familiar trend as retail investors tend to focus on absolute yield rather than credit spreads. There is generally a significant time lag between movements in wholesale swap rates and retail bond yields with the latter tending to be impacted only after a material and sustained move in the former.
The release by the trustee of payments to South Canterbury Finance Limited debt holders also helped maintain demand in the secondary market and assisted in reigning in credit spreads even in the face of the new issue retail supply.
We remain of the view that investors who take a proactive approach to their fixed income portfolios should consider either reducing their duration or ensuring that their longer dated holdings are liquid and of a high quality. It would be prudent to ensure that any longer dated holdings in a portfolio are not solely supported in the secondary market by retail investors but instead will likely find support from institutional investors as well. Note that institutional support is unlikely to apply to any unrated issuance given that institutions tend to predominantly invest in rated securities only.
There is no change to our recommended strategy from the past two months and we continue to recommend shorter dated quality fixed interest securities. We again highlight the 150-180 day terms being offered by NZ registered banks holding an AA credit rating or better where rates of 5.50% should be able to be sought in this space. Kiwibank has also just announced a new account which currently pays 5% effectively on 30 day funds.
Finally Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co.(PIMCO), said a renewal of asset purchases by the Federal Reserve in the US will likely signify the end of the 30-year bull market in bonds. New Zealand fixed interest investors would be well advised to heed this warning when considering their fixed income strategy.
October 2010
Interest rates, in particular New Zealand swap yields, have generally tracked sideways over the past month. Further downside appears likely only should the New Zealand economy re-enter a recessionary period. We maintain that this is an unlikely scenario.
Our investment strategy remains staying short in duration – i.e. retaining funds for 180 days or less. Bank deposit rates remain attractive with yields of up to 5.50% being achievable for 150 day money in the current environment.
If investing in longer dated securities for income reasons, investors should ensure that they invest in high quality liquid paper. This implies investing in securities that hold a Standard and Poors credit rating of A+ or higher. This should mean that if swap yields move higher, investors may be able to reposition accordingly.
We reiterate that investors should be shortening the duration of their fixed interest portfolios by selecting shorter-terms (less than 12 months) for re-investing maturing investments. For active fixed interest investors who purchased fixed interest securities some time ago at much higher market interest rates; they should consider selling down in the secondary market to realise the maximum capital gain. Please note that this strategy does not necessarily apply to those investors who are relying on income unless they are willing to sell now and wait for potentially higher interest rates in the future.
We strongly recommend that for those investors who hold poorer quality issuance that is unrated or sub investment grade then they should use the current market environment to reduce exposure as per the bullet point above.
September has seen three new retail bond issues announced. We are conscious that a number of companies are currently tapping the market for five and seven year funds. This is occurring both here in New Zealand and also offshore. This may be indicative of the fact that they too see longer term rates rising and believe that now is a good opportunity to lock in their longer term funding at current levels. Now is not the time to be induced by investing in unrated and / or higher risk debt; especially where it is of a longer term nature.
September 2010
The decrease in term interest rates (three to 10 year maturities) in the marketplace over the last six months does not make it an attractive time to invest "long" at current market fixed interest rates.
Investors should be shortening the duration of their fixed interest portfolios by selecting shorter-terms (less than 12 months) for re-investing maturing investments. For active fixed interest investors who purchased fixed interest securities some time ago at much higher market interest rates; they should consider selling down in the secondary market to realise the maximum capital gain. Please note that this strategy does not necessarily apply to those investors who are relying on income unless they are willing to sell now and wait for potentially higher interest rates in the future.
Be aware that a number of corporates are currently tapping the market for five and seven year funds. This may be indicative of the fact that they too see longer term rates rising and believe that now is a good opportunity to lock in their longer term funding at current levels.
Now is not the time to be induced by investing in unrated and / or higher risk debt; especially where it is of a longer term nature.
Banks are currently paying deposit interest rates well above wholesale and carded retail rates. It pays to shop around in this market environment and await specials offered by banks.
As more evidence comes into the marketplace over the next several months that the US economy is recovering to a reasonable growth rate, US 10-year Treasury Bond yields will start to move upwards again from the current 2.50% to 3.50%/4.00%. In turn, that anticipated increase will lift New Zealand Government Bond and wholesale swap interest rates. It may be early 2011 before these expected market adjustments take place.