Roger J Kerr says the conditions are currently ripe for both corporates and investors to reap a mutually beneficial harvest

By Roger J Kerr

Investors always have choices as to how they weight their portfolios between the investment asset classes of equities, property and fixed interest securities/bank deposits.

Due to very low interest rates over recent years many investors switched their money away from fixed interest securities and bank deposits into NZ shares and property. The weight of investment flows into these two asset classes certainly contributed to impressive capital gains over the last five years as the charts below confirm.

Is there now a risk of the music stopping for equities and property after five years of spectacular investment returns?

The question is how much will rising interest rates over the next few years would take the gloss of equities and property and cause a switch back to fixed interest securities and bank deposits? In other words, how high would corporate bond yields or bank deposit interest rates have to be to attract funds back from shares and property?

I do not have the definitive answers to these questions, however my sense is that many investors will be looking to cash-up their property and equity gains, reduce market related risks and seek the safety of corporate bonds returning around 5.00%.

It may take a bit longer to get bank deposits up to these levels.

Contact Energy recently issued a 6-year bond at 4.40% (1.50% over the swap rate) which was snapped up. Wellington International Airport issued an 8-year bond at 1.60% above the swap (= 4.90% all up) which did not attract the same level of intense investor demand.

It would seem that BBB rated (or equivalent) corporates could issue 7-year tenor bonds at near to 5.00% all up (3.20% + 1.80% margin) and attract plenty of investor interest.

The market window of opportunity for corporate borrowers to tap the non-bank debt market (for a tenor longer than what banks offer) may be open again and should be taken advantage of.

A smartly priced corporate bond is one that both issuer and investors come away from the transaction well satisfied.

These conditions appear ripe for both parties currently.

Daily swap rates

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com