Loading
Loading...

Complete Lending Solutions Est 2002

Get in touch | cls@cls.com.au | 0427 257 257

Is the Multi-Decade Bond Bull Market Over?

Yes! It is very likely that the 3-decade long bull bond market (lower interest rates) ended on 2 August 2016.

 

On this day, the 10-year Commonwealth government bond futures contract traded at 98.20 (equivalent to 1.80% yield) on the ASX 24 Futures platform (aka Sydney Futures Exchange). The 3-year Commonwealth government bond futures contract traded at 98.70 (equivalent to 1.30% yield).

http://www.asx.com.au/asx/markets/futuresPriceSummary.do

 

The 3-year contract closed on 23 June 2017 at 98.19 (1.81% yield) and the 10-year contract closed at 97.585 (2.415% yield).

I don’t know what fundamentals (inflation, stagflation, escalating budget deficits, credit downgrades – Moody’sdowngraded the banks last week – etc) will cause interest rates to rise significantly and sharply.

 

But, I will be an alarmist – till proven wrong  and sight technical analysis (the recording of the actual history of trading – price changes, volume of transactions, etc – in a commodity and then deducing the probable future trend)that the 3-year contract is just 0.39% away (97.80 on the graph below – red line) from a significant drop to 96.75 (orange dotted line) (sharp increase in yield from 1.81% to 3.25%). Ditto 10-years.

 

This is a significant almost 4-year technical analysis formation (length of the red line) and cannot be ignored.

What Matters

Home loan fixed rates as well as variable rates are at or very close to historical lows. The gap between 2 and 3 year fixed and variable rates (blue line and green line) is very narrow (i.e. fixed rates are almost at par with variable rates) whilst there is an increase for a term of 5 years and longer.

 

Where Do We See Value?

Though there has been a noticeable increase in fixed rates since August 2016, there is still selective value in considering fixed interest rates especially for owner occupied home loans.

2yrs          worth considering – but too short of a term

3yrs          worth considering –  even better if it comes with an offset account and unlimited extra repayments

5yrs          worth considering – for those that have large loan amounts and would like to hedge

10yrs       not worth considering – 10-year interest rates are too high compare to 5-year term

Jun 24th, 2017
Official Cash Rate & Future Direction of Interest Rates – April 2019

The below graph plots the Implied Forward Interest Rate yield curve (blue line), and the Interest Rate Swap yield curve (red line).   The yield curve is interpreted as follows – (i) Short Term (less than 6 months) – the Reserve Bank to cut the official interest ra...

Official Cash Rate & Future Direction of Interest Rates – December 2016

The Reserve Bank decided to leave the Official Cash Rate unchanged at 1.50% on 6 December, 2016.   Why did some lenders increased variable interest rates the day before the Reserve Bank board meeting? This is what the lenders have said. There is a need to regularly review interest r...

Official Cash Rate & Future Direction of Interest Rates – August 2016

The Reserve Bank reduced the Official Cash Rate from 1.75% to 1.50% on 2 August 2016. Is the multi-decade bond bull market over? The 3 decade long bull bond market seems likely to be almost over because – 1. First, quantitative easing, bond purchases and negative interest rates are in...

Implied 3 Month Forward Interest Rates

What does the Interest Rate Swap Yield Curve Imply? What is a Yield Curve? The yield curve shows the relationship between yield and the term to maturity, at any given point in time. It provides important information on what the wholesale market’s expectations are on monetary policy, e...