http://www.interest.co.nz Intro Hello. I'm Bernard Hickey with daily briefing from interest.co.nz... Today, we'll look at why the 3 month US Treasury bill rate hit a 50 year low of 0.56% overnight. This sounds like a dry discussion. It's not. It's all about financial market terror. Than we'll look at the latest from the Fairfax Media Home Loan affordability survey, which shows affordability remains at woeful levels. Terror on Wall Street But firstly, we look at something not seen in financial markets for 50 years. Last night the interest rate for 3 month US Treasury bills fell to a record low of 0.56%. What this means is that investors are so desperate to get their hands on these things they bid up the price so high that the yield dropped to 0.56%. One thing to remember whenever you're looking at markets for fixed interest securities. When prices go up interest rates go down. This reflects nothing less than complete financial market terror. People are so afraid of being stuck with a share or a bond that collapses in value that they want to buy the one sure thing they know. That's a debt protected by the power of the world's biggest government to tax the world's biggest economy. To give you an idea of how low this is, just compare the 3 month Treasury bill rate with the 90 day bank bill rate in New Zealand, which is currently at 8.86%. The gap between New Zealand and US short term interest rates is now over 8%. That will protect our currency for now as foreign investors who want some yield will go hunting for higher interest rates. Although this morning we've seen the New Zealand dollar fall almost 2 US cents in less than 12 hours as the return of fear after yesterday's relief hurts the so-called carry trade. But when markets calm down a bit our currency is likely to rebound over 80 US cents again, just as long as our interest rates are so high. Home Loan (un)Affordability Now we look at the latest figures from the Fairfax Media Home Loan affordability reports for New Zealand. These reports prepared by interest.co.nz show affordability improved marginally in February. That's because the fall in house prices seen in the last month was almost all wiped out by higher interest. But just because housing is slightly more affordable doesn't make it affordable. More accurate, it's slightly less unaffordable. Most houses remain basically out of reach for most income earners. The only ones who can afford it already have masses of equity built up in their homes or are getting help from relatives or the Lotteries Commission. The home loan affordability report shows the average 2 year fixed mortgage rate rose almost a quarter of a percentage point to 9.56% in February, which almost cancelled out the effect of a 0.7% fall in the median house price to NZ$337,500. This meant the proportion of median take home pay required to service the mortgage on a median house nudged down to 80.2% in February from 80.8% in January. But this is still worse than the 74% of after tax pay required in February last year and the 43.3% required five years ago. Most bankers believe anything more than 40% of after tax pay is unaffordable. Affordability improved sharply in Northland because of a larger than average slump in house prices. Home loan affordability improved marginally in Auckland, Hawkes Bay, Gisborne, Manawatu, Wanganui, Otago and Southland because of falling house prices. Affordability worsened in Waikato, Wellington and Christchurch as prices either continued to rise or were flat, adding to the impact of higher mortgage rates. I'm Bernard Hickey from interest.co.nz with the Daily Briefing. Have a great Easter break. Catch you on Tuesday.

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Added: March 19, 2008

Intro Hello. I'm Bernard Hickey with the daily briefing from interest.co.nz... Today, we'll look ahead to tomorrow's decision by Reserve Bank governor Alan Bollard on our official interest rates and what it might mean for people taking our mortgages and investing in term deposits, And we'll have a good close look at the sewerage system in Alabama's largest city. Believe me it's worth the wait because it may eventually effect interest rates here. Story 1, But firstly, we look ahead to tomorrow morning's decision by the Reserve Bank governor Alan Bollard on our official cash rate. The headline is that all economists expect him to keep the cash rate on hold at 8.25%. That bit's not in debate. The key question will be what he says might be the bank's next move and his general commentary on inflation, the economy and the upcoming election. Things change every day in the nuances of what the RBNZ's outlook might be and today is no different. Last night the Bank of Canada cut its official interest rate by a bigger than expected half a percentage point to 3.5%. It also warned that the fallout from the US slowdown on the global economy will be worse than many expect. Canada should know. It depends on the US for a good chunk of export earnings. Meanwhile, the Reserve Bank of Australia actually lifted interest rates yesterday. It is worried about inflation and wants to see the economy slow down. Australian economic activity is getting a big boost from the Chinese-driven demand for iron ore, coking coal and other metals. Just yesterday, Australia forecast its minerals and energy exports would rise 33% this year, well above the 7% seen last year. This matters because Australia is the biggest buyer of our exports and Bollard has said he is watching Asia and Australia closely. However, it was worth looking at the commentary with the Australian move yesterday, which seemed a lot more relaxed about inflation and cautious about the outlook than previous statements. This encouraged currency traders to drag the Aussie dollar lower overnight in anticipation that the Reserve Bank of Australia may not hike rates again any time soon. The end result of this for New Zealand is an interesting balance. We have an inflation problem, but we have a slowing housing market and subdued consumer spending. We are also seeing most of the global economy starting to slow down because of the US economic slowdown and the sub-prime crisis. But Asia and Australia are still rocketing along. My pick is that Bollard will keep rates on hold and issue a balanced statement, meaning he doesn't have a rate hike or rate cut bias. That will actually be a more relaxed view than his previous comments, which were biased towards a rate hike. Bollard announces his decision and releases his views at 9am. Story 2 Now for a story we wouldn't normally touch. This is all about a sewerage system in the Alabama city of Birmingham. Bear with us. This story helps explain why mortgage rates are increasing slightly in Blenheim and the rest of New Zealand. It all starts with the Jefferson County treasurer deciding to refinance the sewerage system for Birmingham by sell a bunch of bonds that have a floating rate. Unlike a lot of fixed interest bonds, these have their rate reset every week at an auction run by banks. In recent weeks these auctions for local government bonds with adjustable rates have virtually shut down. That's because many of these bonds were insured by bond insurers have gotten into all sort of trouble insuring other much more complicated bonds and derivatives. One of the insurers FGIC was the insurer behind the Alabama bonds. Its rating has been downgraded and the interest rate on these floating sewerage bonds has jumped sharply. Jefferson County's interest bill has risen over $152 million in a matter of weeks. It also bought a bunch of fancy interest rate swaps to hedge its exposure and now will have to buy them back for over $1 billion. This squeeze has gotten so bad that Jefferson County has actually warned investors it may default on the bonds. This is not an unusual example of the extreme stress going on in US credit markets. Many US universities have stopped making student loans because the markets have shut down. So what does this mean for us. Essentially it means a lower appetite for risk globally and because New Zealand borrows more than $10 billion a year from foreigners that means we have to pay a little bit extra to keep them happy. And that is being passed on to mortgage holders right now. This morning Kiwibank increased its 2 year fixed rate mortgage by 20 basis points to 9.6%. From the sewers of Alabama to the suburbs of Blenheim. Global credit markets connect us all. I'm Bernard Hickey from interest.co.nz with the Daily Briefing. Catch you on Thursday.

Author: ofInterestNZ
Keywords: nz interest borrow invest business economy finance news
Added: March 4, 2008

But firstly, let's have a quick look at what's happening with the global credit crunch, which has so farm trickled through to higher mortgage rates here and occasionally, some New Zealand dollar weakness. We had some big and ominous news overnight Firstly in Europe, where the German government has been forced to stump up €1 billion to bailout out a bank hit hard by the US sub-prime crisis. This widens the scope of the global credit crisis and increasing chances of instability in continental Europe. Britain has already had to bail out the Northern Rock bank after its funding sources dried up, sparking a run on the bank. This is the third bailout for Germany's IKB bank, which specialises in lending to small businesses, and the first time the German Federal government has had to inject its own money. None of the big Australian banks that run New Zealand's banking system have had to declare any sub-prime losses and not expected to. The biggest direct exposure in New Zealand so far has been the collapse in the value of Macquarie Fortress Notes. But it could get worse. We had news overnight that the Port Authority of New York tried to sell bonds through Goldman Sachs but eventually had to accept an interest rate of 20%. That's up from 4.3% last week. Elsewhere, Michigan has suspended its student loan programme after turmoil in credit markets shut down its own borrowing programme. The Wall St Journal has reported that about US$10 billion worth of bonds issued by student loan authorities for Montana and Mississippi, Carnegie Hall and Deerfield Academy, an exclusive Massachusetts prep school, failed to find buyers at an auction on Tuesday. This looks very dangerous. When the credit markets shut down for reputable borrowers such as local governments and public universities, then America's economy has a problem. This is causing many to believe that the US Federal Reserve will cut official rates by a further 50 basis points to 2.5% either on or before it meets again on March 18. This is partly because the previous 125 basis points of cuts inside two weeks in late January appear not to be flowing through to consumers and businesses because of the credit market turmoil. Two further rate cuts are expected later in 2008. Ironically, this will make our currency more attractive in the long term, although another period of financial market turmoil is likely to scare off these yield hungry investors in the short term.

Author: ofInterestNZ
Keywords: nz interest borrow invest business economy finance news
Added: February 13, 2008