Deja vu Europe on the Brink Again
Christian Hawkesby the Head of Fixed Interest at Harbour Asset Management recently released their New Zealand Fixed Income Commentary for June 2012.
- The European sovereign crisis has moved into a new phase, with a sharp economic deterioration, heightened political uncertainty, and policy paralysis.
- Concerns about Spain are on a different scale to Greece. Spain is too big to let fail, but it could also be too big to be saved.
- Fixed interest markets are left coping with two very strongly opposing forces: extremely negative news flow out of Europe versus market prices that are already factoring in extremely bad European scenarios.
- The strong flight to safety has driven US and German government bonds to all-time expensive levels.
- We can understand the appeal of NZ government bonds in this environment. Despite yields being at all-time lows, to global investors New Zealand government bonds provide stability and comparatively high yield.
- We do not expect the Reserve Bank of New Zealand to cut its Official Cash Rate (OCR) unless there is a major accident in Europe that seizes up funding markets. Market pricing reflects the small chance of a large cut in 2012.
- Corporate bond markets have been surprisingly resilient throughout, and we see this as a reason to remain cautious in this market until Europe settles.
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