Harbour Asset Management - New Zealand Fixed Income Monthly Commentary for June 2012

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.

Key Points:

  • 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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