13th April 2016
Bond yields remain extraordinarily low, and any sell-off in bonds could be short and sharp. Investors should consider rebalancing their holdings in NZ equities given recent returns.
Bond yields remain extraordinarily low, something that appears implicitly sanctioned by Janet Yellen. In a speech last week she reinforced a message that rate hikes will “proceed cautiously”.
The Federal Reserve’s caution may not prove tenable as the year progresses. The gap between core inflation and bond yields has closed to its narrowest point since 2013. If inflation continues to gather momentum, the sell-off in bonds could be short and sharp. We expect 10 year rates to end the year at 2.75% or higher (versus 1.75% now).
In New Zealand, the economy continues to look relatively robust, underpinned by strong net migration, construction and tourism.
Even against this positive backdrop, the performance of the New Zealand share market is extraordinary. NZ Equities now trade at a 25% valuation premium to the rest of the world. A rise in bond yields would make this difficult to sustain. Although we remain “neutral” toward New Zealand shares in our asset allocation, investors should consider rebalancing their holdings given recent returns.
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