Still lower home mortgage rates are on the cards as NZ bond yields sink to 30 year lows. Photo/NZ Herald.
Still lower home mortgage rates are on the cards as NZ bond yields sink to 30 year lows. Photo/NZ Herald.
Home mortgage rates look set to plumb record lows after government bond yields sank to their lowest point in just over 30 years this week.
The New Zealand 10-year swap rate hit 1.94 per cent and the 10 year government bond yield hit 1.71 per cent yesterday, continuing a trendthat has prevailed here and around the world since the start of the year as inflation pressures evaporate and as evidence of a slowdown in the global economy starts to build.
Today's 10 year bond yield is a far cry from its record high of 19.2 per cent in May, 1985, and is only fractionally higher than the official cash rate, which the Reserve Bank cut to 1.50 per cent from 1.75 per cent early this month.
Bond dealers said the local market was reflecting sharply lower yields in Australia, which in turn had been driven by expectations that the Reserve Bank of Australia (RBA) will cut its rate three or possibly four times over the course of the next year.
Economists at JP Morgan have predicted the RBA will eventually take the cash rate to 0.5 per cent from 1.5 per cent at present.
In addition, yields in the United States and Europe have been falling because their central banks have backed off their tightening plans in view of the slowdown in global growth.
Benchmark US 10 year bonds hit 2.26 per cent - down by 10-15 basis points since last week.
Investors will be bracing for the likelihood of still lower term deposit rates, says Mark Brooks of NZ Funds.
"Globally, there is a trend where inflation is lacking so markets are pricing out inflation and yields are falling as a result," said Mark Brooks, head of income at NZ Funds.
Brooks said investors would be bracing themselves for the likelihood of still lower term deposit rates.
"Lower mortgage rates will probably be the next leg as well," Brooks said.
All New Zealand's big banks have sub 4 per cent, two year fixed mortgage rates on offer.
Westpac senior markets strategist Imre Speizer said the market was pricing in at least three rate cuts from the RBA.
"That has an influence on what the market has priced in for the RBNZ," he said. "If the RBA cuts three times the RBNZ will not stand still."
The yield curve in New Zealand has remained flat while in the US it has turned slightly negative, prompting talk of a possible recession there.
"There is some debate as about whether this is a major harbinger of recession, but we have not got to that point yet," Speizer said.
He added that the very low domestic bond yields were likely to bring record low mortgage interest rates which, together with the Government rowing back on a capital gains tax, should give the housing market a boost.
In general, bond yields have been trending downward since the 1980s as central banks around the world introduced inflation targeting in response to the runaway prices of the 1970s.
Since 1985 the trend has been in one direction - in good part due to inflation being tamed from its 1970s peak.
Inflation targeting since then had made inflation more subdued and yields had fallen along with it.
The second part of the bond yields story came with the 2007-8 global financial crisis (GFC), which resulted in central banks loosening the reins on monetary policy to stave off a worldwide economic downturn.
Since then, inflation has not bounced back to the levels that it was expected to, and yields have fallen further still.
