'Lower forever' no longer safe interest rate view

Improving term deposits rates are putting pressure on other asset classes to provide a better premium.

Monday, November 21st 2016, 5:59AM

by Susan Edmunds

Many investors have been forced to look for somewhere other than the bank to deposit their money as interest rates fell to historic lows – and stayed there – over recent years.

But the United States’ Federal Reserve is preparing for a round of interest rate rises, and banks in New Zealand - faced with the increasing cost of international funding - are competing hard for domestic money.

That has meant the rates available for depositors are once again lifting.

“Term deposit rates are a bit better at the moment even though interest rates have gone down. There’s competition from banks driving that,” ASB’s general manager of wealth, Jonathan Beale, said.

“Anecdotal feedback I’ve heard is that customers aren’t pushing so hard and are a bit more accepting of the rates at the moment. There’s a bit of behaviour changing, they’re seeing term deposits are better than they were. They’re not happy but they are happier.”

Greg Fleming, head of investment strategy at AMP, said the increase in term deposit rates to attract investors had a flow-on effect to other parts of the market.

“Other assets have to have an attractive premium over those term deposit rates so other assets are under pressure to exceed term deposit rates by an adequate margin. People thought term deposit rates were intolerably low but now they are offering a slightly better return.”

He said most people had started to realise that the “lower forever” hypothesis was no longer a reasonable position to take on interest rates.

The Trump presidency in the United States could be expected to have an inflationary effect and the bond market was already starting to reflect that.

Beale said it was possible that New Zealand equities could suffer if interest rates rose significantly. Many of the dividend stocks have been a popular option for yield-seeking investors over recent years.

Fleming agreed there had been a drop in offshore interest.

But he said it was not as simple as yield stocks being less appealing.

“Not because the yield gap has closed off but because of a round of profit taking. Some of the global yield-hunters are in it for the long haul but others are short-term momentum traders and once the market has lost clear momentum and is no longer outpacing the rest of the world they step back.

“Global investors are starting to worry about sustainability and how sustainable those yields are, not next year but in subsequent years. Investors are more sensitive to the fact yield is not guaranteed forever and they are pocketing gains and reassessing the opportunity set.”

Tags: interest rates term deposits