More importantly, longer-term interest rates have actually declined this year, despite the fact that the OCR has been rising. The five-year swap rate, which many fixed-interest securities are benchmarked against, has fallen from 4.7 per cent at the beginning of 2014 to 4.2 per cent currently.
Although the Reserve Bank can control the OCR, it has little influence over longer-term rates. These are determined by what is happening globally, rather than what the Reserve Bank is trying to impose on domestic banks.
Overseas, debt levels remain high, inflation is non-existent and there is no pressure on any central banks to increase interest rates. These are close to zero in the United States, Britain, Japan and Europe. In Germany, a retail bank recently announced that it would charge negative interest rates for large deposits, meaning the bank will charge customers for hanging on to their money.
Another major issue is that reinvestment opportunities are few and far between. Maturities and redemptions have far exceeded new issues, so investors are struggling to simply maintain fixed income portfolios at current levels.
Many of the recent maturities are from the 2009 era, which yielded much higher rates, so many investors will have had quite a shock when their adviser has discussed reinvestment options.
There is no easy answer to this predicament, although investors have flocked to the attractive dividend yields on offer in the sharemarket over the past few years in search of better returns.
With an average gross dividend yield of more than 6 per cent on offer from the NZX50, and listed property shares paying higher still, it is difficult to argue with this strategy.
However, by supplementing lacklustre fixed-interest yields with attractive dividends from shares, many investors have moved up the risk/return curve more than they realise.
New Zealand shares have risen 61 per cent in the past three years, so of course nobody is complaining at the moment, but these sorts of returns are exceptional, not normal.
Unfortunately, it will probably take a rough patch for those investors to acknowledge that their risk profile is more conservative than their portfolios suggest.
Maybe, in this world of stubbornly low interest rates, we all need to acknowledge that returns will simply be much more modest from here on. Maybe four is the new seven.
Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.
