Fixed interest:
Will 2000 be as bad for fixed interest markets as last year? Fergus McDonald makes some 12 month predictions.
Friday, February 4th 2000, 12:00AM
The year ahead promises to be kinder to investors in the fixed interest markets than 1999 turned out to be, however, don’t chill the champagne just yet. The market conditions are not yet appropriate for a significant rally.
The Government Stock Index returned close to zero over the past year as interest rates on long and short term maturities continued to rise in response to increasing growth levels domestically and internationally and the prospect of rising inflation pressures.
The outlook for economic growth, inflationary expectations and Central Banks response to this environment will continue to dictate the direction of interest rates over the year ahead. In other words, the strength and longevity of the global economic expansion will be the ultimate determinant of the fixed interest market’s performance. Even though yields on long bonds have risen significantly from their lows in 1998, we expect further modest rises in the first half of 2000.
With interest rates on longer maturity fixed interest assets in New Zealand being determined largely by rates of similar maturities in other dollar based economies of the US, Canada and Australia, it is important to have a global perspective on interest rate markets before attempting to forecast local interest rate moves. Short term rates are more aligned to the domestic economic cycle and therefore local factors are more important in the analysis of where interest rates are going in this part of the yield curve.
Some thoughts on the year ahead:-
- Ninety day Bank Bill rates are forecast to rise to around 7 per cent by year end with inflation rising towards 2 per cent this year and 2.5 per cent in 2001.
- Bank Bill rates at 7 per cent imply a floating mortgage rate of around 9 per cent which we believe will be unappealing to borrowers and further reduce the probability of house price inflation. Rates at these levels should also dampen consumer confidence when combined with a mid year rise in the top personal tax rate.
- The NZ yield can be expected to flatten further with both short term and long term rates above 7 per cent. We expect longer term bonds to outperform shorter maturities as Central Banks contain inflationary pressures with tighter monetary conditions.
- The NZ dollar is expected to strengthen as exporters benefit from a good agricultural season, increasing global demand and rising commodity prices. The current account is forecast to improve but will continue to be a risk factor to the NZ dollar, interest rates and NZ assets in general.
- Internationally, Central Banks are trying to determine how much they will raise rates by, not if they will raise rates. Synchronized growth in the major economies is occurring, this reduces the world’s economic reliance on the US but also means the US economic expansion can continue.
- Presidential election years in the US are usually accompanied by increased federal government expenditure. Increased fiscal stimulus to the US economy which is already growing strongly will likely increase the extent of monetary policy tightening by the Federal Reserve.
Forecasts for 2000
|
Current 24/1/00 |
Forecast 2000 Trading Range |
|
|
90 day Bank Bills |
5.80 |
5.70 to 7.20 |
|
10 year NZ Government Stock |
7.50 |
7.20 to 7.90 |
|
NZ dollar (TWI) |
54.31 |
54.0 to 57.0 |
|
US 10 year bonds |
6.80 |
6.60 to 7.20 |
Fergus MacDonald is the fixed interest manager for New Zealand Guardian Trust
Credit Suisse Asset Management
London-based Credit Suisse Asset Management explains its strategy and outlook for the next three months in the global bond market.
Despite an expected increase of a 0.25 per cent to 0.50 per cent in the Federal's Fund's rate, our expectation is that long dated yields in the US Treasury market will decline in the coming quarter. This in turn will flatten the yield curve further. Factors supporting such a belief include the limited increase in reported inflation figures and the potential for some slowdown in US economic growth.
In Japan, we expect yields to drift gently higher over the quarer, rather than spiking upwards. Recent data suggests a slowingdown in growth which may continue given the strength of the Yen in the past 12 months, but despite this the supply of new issurance is likely to prove overwhelming.
European growth is expected to be stronger than consensus (albiet the consensus projections have been revised upwards). In this environment, yields will not decline on a sustainable basis in the quarter.
Accordingly, we are positioned overweight in the US bond marekt relative to Japan and Europe.
The outlook for high grade credit in the US remains good and we recommend continued gradual diversification from Government bonds. In Europe, however, we remain cautious as we contiue to expect a high level of issuance putting spreads under pressure. In emerging markets. Too, we are cautious haing attained our target spread levels and we recommend reducing exposure at current levels.
In the currency markets we expect a reversal of last year's main themes, ie: we forecast that the US dollar will strengthen against the Yen but weaken against the Euro over the quarter.
To read another story click on a link below:
| « Property: Yields look to firm up this year | NZ economy: Three key factors drive market » |
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