Fixed income investors need to go long for returns

by Sonia Speedy

Sunday, 11 October 2009

Short term cash rates are likely to remain low for some time, with those investors seeking higher yields forced to start "moving out along the yield curve", according to ING NZ.

ING head of fixed interest Graham Ansell, said those seeking to achieve higher yields without taking on the credit risk would have to look to longer term fixed interest assets, bringing duration risk with it.

"This doesn't mean that (short term) rates aren't going to go higher, but we just don't think that those rates are going to go anywhere near the 6%/7%/8% that we've been used to for the last 15-20 years," Ansell said.

Longer term rates were likely to be volatile due to the opposing forces currently at play, but would remain in a 1% band around their current level, he said. While 10-year rates could go as high as 7% or as low as 5%, they were unlikely to go much further.

"It's not like we'll see long term interest rates going to 8%/9%/10% as we have in the past, but they are still going to be substantially higher than where cash rates are," Ansell said.

Ansell suggested it could be years before the Government guarantees around finance companies and bank term deposits were removed, due to the need for the change to be part of a co-ordinated global exercise.

"It will have to all be done at the same time. If it is not done at the same time, with the way that money flows globally, people will invest in the Government guarantees of other countries if they can access it," he said.

Ansell was not concerned about the risk of hyperinflation, believing the world financial situation was not so bad that money would have to continue being printed to the point that hyperinflation became a problem. He added that with more people on floating mortgage rates than in the past, monetary policy would be an increasingly effective tool for the Reserve Bank.

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