Bond markets have undergone a sea change over the last few
months, heralding the start of a more "normal" investment
climate after years of unnaturally low interest rates, fixed
interest specialists said.
Since May, bond yields have risen significantly both in New
Zealand and the major financial markets - led by the United
States - on the expectation that central banks will soon
curtail measures to pump-prime their GFC-battered economies.
On that score, this week's US Federal Open Market Committee
meeting is shaping up to be an important one for the markets
because expectations are that the Fed will reduce its US$85
billion a month bond-buying programme, paving the way for
more normal conditions to eventually prevail.
While the Fed is still a long way off actually raising rates,
the start of its so called "tapering" of the stimulative
measures will be seen as an important step in the
rehabilitation of the US economy and its northern hemisphere
counterparts, bond market participants said.
Domestically, the Reserve Bank has signalled that next year
it intends to start raising its official cash rate, which
sits at 2.5 per cent.
"There has been a change in the dynamics of the investment
market and bonds are looking more attractive at the moment,"
Bank of New Zealand treasurer Tim Main said. "I would not say
that the risks are entirely gone, but things are improving
and confidence globally is lifting," he told APNZ.
On the home front, demand for Westpac NZ's $800 million
five-year bond, which yielded 5.545 per cent, was seen as a
significant indicator of investor demand - particularly for
instruments yielding over the magic 5 per cent level.
"Now that yields on 5 year bank debt have risen over a
percentage point since May, it appears investor appetite has
returned," Christian Hawkesby, head of fixed income at
Harbour Asset Management, said.
Renewed investor demand for bonds is also a global phenomenon
- US telecommunications firm Verizon this week raised US$49b
- the largest corporate bond deal in history.
BNZ's Main said investors now faced the opportunity of
accessing higher yields without the risks of inflation
rapidly rising to erode returns.
Shifts in the bond markets will have an impact on fund
managers' asset allocations after years of unnaturally low
The New Zealand share market has gained about 25 per cent
over the last 12 months, due in part to local dividend-yield
stocks looking attractive relative to fixed interest markets.
Philip Houghton-Brown, head of investments at Mercer New
Zealand, said the interest rate markets were going through a
period of readjustment. "Investors are now just re-pricing
the likelihood of growth on a more sustainable path," he
"Confidence - that the recovery is sustainable - is returning
in the United States as well as in New Zealand," he said.
Benchmark US 10-year bond yields were at 1.6 per cent in May
and are now pushing 3 per cent, which is a big jump in bond
"The big worry for bond markets over 2011/12 and 2013 has
been central banks keeping rates artificially low and that
they should correct higher at some stage," Hawkesby said.
"The correction is happening quicker than people thought," he
"Now it's becoming more interesting for investors to consider
weighing up the pros and cons of locking in for a longer
investment horizon, particularly when you consider the
official cash rate is still at 2.5 per cent, and with some of
these corporate bond issues coming out at 5.5 to 6 per cent.
"Our house view is that the jump in yields over the last
couple of months has been part of that correction and that
they are likely to drift higher over time as central banks
continue to step away from the amount stimulus that they have
provided," he said.