Markets taste negative interest rates
AUCKLAND: Investors caught a glimpse of what negative interest rates will look like when shortdated government bond yields went subzero for the first time last month.
The three and fiveyear bonds went fractionally below zero around the middle of the month, reflecting expectations at the time that the official cash rate (OCR) would go into negative territory sooner in 2021 rather than later.
‘‘The market played around with the idea and there were people willing to buy bonds at those negative yields,’’ ANZ senior strategist David Croy said.
Yields started going negative on September 11 but turned marginally positive after the Reserve Bank, in its September 23 statement, said its funding for lending programme (FLP) would be ready before the end of the year.
The FLP comment brought about a subtle change in expectations as to where the official cash rate, currently set at 0.25%, will go early next year.
The bank’s line has consistently been that the rate would stay where it is until at least March next year.
Since last month, the short end of the bond curve has moved fractionally into positive territory.
The 2025 bond is now plus 0.0325% from minus 0.075% last month while the threeyear bond now trades at zero from minus 0.010%.
‘‘The market is recalibrating its view about where the official cash rate is headed,’’ Mr Croy said.
The market had priced in the chance of a cut in February next year but had since backed off that idea, he said.
‘‘It has gone from being broadly in favour of a cut in FebruaryMarch, to being broadly in favour of no change before March,’’ he said.
‘‘Essentially what has happened is the market has started to shy away from the view the Reserve Bank will cut early.
‘‘Backing that view has been the bank’s apparent shift for stimulus to be delivered by the FLP by the end of the year.
‘‘That’s a strong hint that the FFP will come in November and, as a stimulative tool, that will give the Reserve Bank some breathing space.
‘‘The market has read that as meaning that there is a chance that it will take them a little longer to cut, and a little bit longer to get to negative,’’ Mr Croy said.
Last month’s shift in the market meant that for two weeks in a row the Government, in its weekly bond tender, was able to sell bonds at a negative yield.
The lowest yield in the September 17 bond tender of May, 2024 bonds was minus 0.0325%.
A week later, the yield on the same maturity came in at minus 0.06%.
Westpac senior economist Michael Gordon said negative government bond yields showed the extent to which people were prepared to play safe.
‘‘Essentially, government bonds are the lowestrisk product in the interest rate market and, in times of the uncertainty, people will be willing to invest in something that is safe,’’ Mr Gordon said.
‘‘It’s not just because it’s a lowerrisk asset. It’s also something that can be converted to cash, which is not going to be so much the case with nongovernment bonds,’’ he said.
ANZ expects the Reserve Bank to lower its OCR to minus 0.25% in April 2021, before pausing. — The New Zealand Herald