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).
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.
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
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