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International Fixed Interest Opportunity

I-Shares 1-3 year Treasury Bonds. SHY.US (SHY invests in AAA rated US Treasury bond securities).

Interest rates in New Zealand are now at record lows, with signals from the Reserve Bank or New Zealand (RBNZ) that they could go even lower. Whilst the RBNZ are loosening monetary policy the Federal Reserve in America has begun tightening theirs by increasing interest rates. As a result, interest rates in the US are higher than they are here in New Zealand.

This provides an opportunity for fixed interest investors who are looking for a hedge against a falling share market. During the Global Financial Crisis (GFC) the New Zealand Dollar fell from 79.89c in February 2008 to 50.06c in February 2009. A reduction of 37.3%. Further, the premium on 1 year US treasuries rose 1.9%, implying a 39.2% increase in value for a New Zealand based investor holding US assets. Whilst the GFC is an extreme example, it highlights two things which happen in times of great uncertainty.
1 - The New Zealand dollar falls, as it is a ‘risk on’ currency. Conversely, the US dollar must rise.
2 - Interest rates fall, conversely bond prices rise.

Holding US treasuries would provide you with something you could sell (all things being equal) to take advantage of falling share prices in New Zealand. Given the age of the bull market and the low rates on offer, we feel that adding US treasuries is more attractive than holding cash in NZD or USD. If you are currently holding excess cash, talk to your adviser to see if US treasuries would be a suitable addition to your portfolio.

 

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