If investors believe they\u2019re taking on more risk, they\u2019ll demand higher returns.<\/p>\n
Given the US\u2019 net debt is nearing 100% of Gross Domestic Product (New Zealand\u2019s is at 25% according to the same measure of debt used in an IMF comparison), its interest costs are material. <\/p>\n
Indeed, they\u2019re so eye-watering, a spike in US Government bond yields a fortnight ago pushed Trump to announce a 90-day pause<\/a> on his proposed tariff hikes for countries other than China.<\/p>\n AdvertisementAdvertise with NZME.<\/a><\/p>\n Harbour Asset Management co-chief executive Andrew Bascand characterised the bond market as the US\u2019 \u201cAchilles heel\u201d. <\/p>\n He described the recent sudden jump in US Government bond yields as \u201can awakening moment for the advisers to the President, for Republicans in Congress, and for businesspeople to say, \u2018We need a well-functioning US bond market with reasonable interest rates\u2019\u201d.<\/p>\n ANZ chief economist Sharon Zollner said the US was reliant on the rest of the world to fund its current account deficit and fiscal deficit, worth 7.3% in 2024. <\/p>\n \u201cThat is something you can\u2019t bully your way out of. And it\u2019s not one person you need to convince \u2013 it\u2019s a herd [of investors] that can run, unexpectedly, in unexpected directions,\u201d she said.<\/p>\n Zollner likened the bond market\u2019s response to Trump\u2019s initial tariff proposal to its response to Liz Truss\u2019 proposed big-spend budget that saw her 2022 tenure as British Prime Minister compared to the lifespan of a lettuce. <\/p>\n \u201cWhen you have a lot of debt, you have fewer options. That\u2019s always true,\u201d Zollner said. <\/p>\n However, she feared the market\u2019s reaction to the tariffs marked more than a bout of volatility. <\/p>\n Zollner and Bascand noted that it was unusual for both equity and bond prices to fall and for the US dollar to lose value at the same time. <\/p>\n AdvertisementAdvertise with NZME.<\/a><\/p>\n The situation reflected the fact that investors no longer saw US Government bonds and the US dollar as safe havens during times of instability.<\/p>\n Zollner noted this meant we could no longer rely on the New Zealand dollar depreciating against the US during these period \u2013 a dynamic that had in the past supported New Zealand exporters, and therefore the economy more generally. <\/p>\n \u201cThe idea that US bonds are a hedge against equity volatility is built into every investment portfolio everywhere,\u201d Zollner said. <\/p>\n \u201cAnd if it\u2019s now up for question, that raises potential for some pretty large movements of capital throughout the world, which has potentially very large consequences for exchange rates.\u201d<\/p>\n Zollner was worried some of the conventions that had previously guided investors\u2019 asset allocations and approaches towards risk management were up in the air. <\/p>\n This is wiping trillions off various investment funds around the world, and calling into question what constitutes a low, medium, or high-risk investment going into the future.<\/p>\n Bascand believed a silver lining was that households and banks were better placed to withstand shocks than they were during the likes of the 2009 Global Financial Crisis. Indeed, banks are well capitalised. <\/p>\n With the Official Cash Rate at 3.5%, Zollner also noted the Reserve Bank of New Zealand (RBNZ) had quite a bit of room to loosen monetary policy to support the economy. <\/p>\n She believed some of the fears this would spur rampant house price inflation, as it did during the pandemic, would be curtailed by the RBNZ\u2019s introduction of debt-to-income restrictions on banks\u2019 mortgage lending.<\/p>\n As for the RBNZ intervening<\/a> in the bond market, like it did during the pandemic, or using the war chest of foreign currency assets<\/a> it\u2019s been accumulating should it need to step into the currency market, Bascand couldn\u2019t see this being necessary \u2013 for now at least.<\/p>\n In the meantime, Bascand was confident in the bond market\u2019s efficacy tempering Trump. <\/p>\n Jenee Tibshraeny is the <\/b>Herald<\/b>\u2019s Wellington business editor, based in the parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"If investors believe they\u2019re taking on more risk, they\u2019ll demand higher returns. 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