Craigs Investment Partners broker Peter McIntyre says the latest global rally in sharemarkets, oil price declines and the strong possibility of European quantitative easing have flattened the New Zealand interest yield curve sharply.
That meant both short-dated and long-dated interest rates were practically the same, with no immediate advantage to investors investing on a three-month or a five-year bond.
With inflation benign and interest rates expected to remain flat, New Zealand investors had to get used to looking at a ''real return'' - the difference between the interest rate they received and inflation.
If an investor received an interest rate return of 4.5% and inflation was 1%, the real return was 3.5%. In the case of receiving an interest rate of 13% and inflation was 10%, the real return was only 3%, worse than in times of low inflation and interest rates, Mr McIntyre said.
The New Zealand yield curve had been flattening in virtually an uninterrupted fashion since September 2013.
''Initially, this move happened even during the course of a sell-off in the United States long-end, reflecting the pressure on the New Zealand short-end as the market prepared for the start of the Reserve Bank's tightening cycle.''
In the past 20 years, there had only been two occasions when the five-year swap rate was below 4% and one of them was now, he said. The other was in 2011.
The low rate would give corporates confidence to borrow money for expansion, and not only from banks.
It was likely corporates would issue bonds or capital notes to the public to diversify their borrowing base, Mr McIntyre said.
Banks could be ''fair weather friends'' and corporates were likely to use times of low interest rates to issue longer-dated bonds to secure their balance sheets to lessen their interest rate risk.
The lower interest rates were good news for the economy, with corporates confident of a stable interest rate environment. Things such as building materials should start dropping in price, helping the housing construction sector, he said.
The global impact of falling oil prices and lower interest rates in Europe, America, Japan, Australia and the United Kingdom meant pressure on the New Zealand dollar, which reached a two-and-a-half-year high on Friday against the euro as investors favoured the outlook for the local economy over the weak prospects in the euro zone.
The higher dollar could make it difficult for exporters but it also made New Zealand wealthier, increasing spending power, he said.
''There is an increasing benefit from the prices of imports coming into New Zealand.
''New Zealanders should be feeling wealthier, certainly since post 2008, than in the past.''
Definitions
Yield curve
A line plotting the interest rates - at a set point in time - of bonds having equal credit quality but differing maturity dates.
The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year United States Treasury debt.
The yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
Swap rate
Interest rate swaps are simply the exchange of one set of cash flows (based on interest rate specifications) for another.
Because they trade OTC (over the counter), they are really just contracts set up between two or more parties, and thus can be customised in any number of ways.
