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Markets start betting against low short-term interest rates

Investors are betting against short-term interest rates staying low as the prospect of the Reserve Bank hiking the official cash rate draws nearer, according to AMP Capital Investors.

Tuesday, April 20th 2010, 8:27PM

by Paul McBeth


Head of investment strategy Jason Wong told a media briefing in Wellington the yield curve was "very very steep" at the moment, and that the "market is pricing in the fact that short-term interest rates aren't sustainable at current levels". Investors are betting the Reserve Bank will boost the OCR 155 basis points over the next 12 months, according to the Overnight Index Swap curve, down from 162 points before the CPI data was released.

"Short-term interest rates are being held down by central bank policy," Wong said. "Falling inflationary pressures take the pressure off to tighten (monetary) policy," though he still predicts Governor Alan Bollard will hike rates in either June or July.

Bond markets remained "well-supported" in the near-term as inflation remained on track with expectations. Upward pressure on long term interest rates would widen the spread at the short end, Wong said.

The steep yield curve was keeping speculative trading in bond markets under wraps, with a "big cost going short bonds and into cash," Wong said, referring to selling the securities in the expectation of buying them at a cheaper rate.


Paul is a staff writer for Good Returns based in Wellington.

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