Jeremy Hutton: Milford Asset Management expert on bond yields and interest rates going up

The ongoing conflict in Iran has led to bond yields and interest rates going up all over the world, and it's prompted concerns among experts.

This will impact Kiwis as well, as many KiwiSaver portfolios have taken a hit as a result.

Milford Asset Management's Jeremy Hutton explained further.

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Episode Transcript

Speaker 1 (00:00):
Jeremy Hutson, Milford Asset Management is with us. Alo.

Speaker 2 (00:02):
Jeremy, Hi herether here you going.

Speaker 1 (00:04):
Yeah, I'm good, thank you.

Speaker 3 (00:05):
As we've discussed on the show in the last few days,
bond yields and interest rates as spiking globally, so our
financial market's starting to get a bit nervous.

Speaker 2 (00:13):
Yeah, they are getting into slightly nervous territory. And for example,
the very important thirty year US government bond that has
now got the highest interest rate attached to it since
pre GFC in two thousand and seven. So it's a
little bit ominous there. But the US government it doesn't
help itself that much with its astronomical budget deficit around

(00:35):
seven percent of GDP and with no end in sight.
But you're right, it is not unique to the US.
We're seeing yield spike all over the world link to
the Iran crisis, but it will be putting huge pressure
on government budgets everywhere, and I think we're going to
see that here in zeal On two. Just give them
the higher interest costs that this is going to put

(00:56):
on governments.

Speaker 1 (00:57):
So bond price isn't a lot of key.

Speaker 3 (00:58):
We save a portfolios, we'll be looking a little bit
sad right now, will they?

Speaker 2 (01:03):
Yeah? They will. So bond prices they move inversely to
bond yields, So bond yields up means bond prices down,
and these are going to be hurting in many key
we saver portfolios right now. And as I mentioned, triggered
by the Iran situation and the corresponding fuel cost spike.
And it's just the amount of time that this disruption
has lasted, and the high risks of entrenched inflation in

(01:27):
the bond market is reflecting this. And then the Trump
g meeting last week that was potentially seen as an
off ramp but unfortunately hasn't delivered much on that front
at this point.

Speaker 1 (01:38):
Now, what's going on with the equity market, So they're
largely shrugging these risks off.

Speaker 2 (01:43):
Yeah, it's pretty amazing they have so far. In direct
contrast to the bond market, the U S equity market
has obviously been in a huge run since the Uranian
ceasefire announcement last month, and it's mostly been driven by
this AI narrative in certain technology stocks, not all of them,
but the thinking here is that AI related companies are

(02:04):
not going to be as exposed to Middle Eastern energy prices.
But I think with these higher interest rates it is
gonna It's usually negative for equity markets, so it could
potentially affect them eventually. But I think it's fair to
say that there's plenty of other companies on the US exchange,
non technology ones and the main street US consumer I

(02:25):
think they're going to be feeling the pinch pretty hard
right now.

Speaker 3 (02:28):
Yeah, and what about New Zealand interest rates? Are we
seeing the effects there as well?

Speaker 2 (02:33):
Yeah?

Speaker 3 (02:33):
We have.

Speaker 2 (02:33):
We've seen wholesale rates in New Zealand go up and
that's flowing through into into mortgage rates as well. But
we do a very important rbn Z decision next week.
Doctor Brennan's comments will be very very closely followed. And
she's in a tricky spot or they are in a
tricky spot. There is really no no right answer here.
And on one hand, it would be very brave to

(02:55):
hike the ocr too aggressively given some of the demand
and sentiment has fallen off pretty sharply in the local
economy already, and then interest rates being hiked is just
sort of kicking the economy while it's down. But then
on the other hand, they do have to consider inflation
and trying not to get that embedded again, not helped
by how long the Iranian situation has gone on. But

(03:18):
at the moment the market is pricing about a twenty
five percent chance of a hike, so not that high.
But I think more interestingly is the four hikes that's
assumed later this year and the track that the RBNS
had put out, so I think depending on the tone
of her comments, that could change pretty rapidly.

Speaker 3 (03:37):
Jeremy, it's good to talk to you, mate, always is.
Thank you so much for the expertise. It's Jeremy Hutton,
Milford Asset Management. For more from Heather Duplessy Allen Drive,
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