Sunday, March 15, 2009

Beware the OCR

Bernard Hickey writing in today’s Herald makes useful points about the apparent continued willingness of NZ bond investors to demand relatively low premia for risky investments.

One reason this is inclined to happen is that Government debt instruments and the oft quoted OCR have, at this point in the economy’s journey through recession almost nothing to do with risk and everything to do with currently favoured monetary policy. An OCR of 3% may represent the Governor's view of what rate will get people spending – but that is far from the same thing as a view on risk.

The credit default swap rates – in the markets where such instruments exist – tell a different story. In the EU for example where the equivalent of the OCR is hovering around the 1% – 2% mark CDS rates for Italian government bonds are around 2% or so higher while in the rather more robust Germany the rates are a more modest 0.9% higher (5 year bonds) – so much for European unity.

In assessing risk then – it pays to look beyond the posted price where those prices reflect monetary policy stances.

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