Where have we come from.... where are we now... and where are we going to?

There has been a paradigm shift lower in US and New Zealand 10 year interest rates since the Global Financial Crisis (“GFC”). 10 year interest rates are expected to increase over the next two to five years, but remain well below levels from before the GFC and also below average levels seen since the GFC.

Reasons for global long-term interest rates to increase over the next two to five years include further cyclical recovery in the US economy and gradual unwinding of the US Quantitative Easing (“QE”) government bond purchase programme. New Zealand long-term interest rates closely correlate to those in the US but trade at a higher premium due to economic risks and our reliance on overseas capital to fund the current account deficit. New Zealand long-term interest rates are also expected to be higher than current levels over the next two to five years.

An alternative scenario and reasons why long-term interest rates could move lower is based on global factors such as; aging populations, under-employment, job obsolescence, ongoing QE programmes in Europe and Japan, increased bank regulatory environment and higher bank capital requirements.

In contrast reasons to expect sharper increases in long-term interest rates include stronger US economic recovery also driving commodities demand in emerging economies, success of European QE in prompting consumers to spend, and Chinese/Japanese investors scaling back/selling their holdings of US Treasury bonds.