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:-
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.
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