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 ineffective compare to the Global Financial Crisis.
2. As a result Total Australian Debt is now over 6 trillion dollars.
3. Probably, unsustainable government budget deficits and national debt levels will result in credit rating downgrades.
4. Consequently, it will result in higher funding costs for all.
5. In addition, private sector debt is well over 5 trillion dollars.
6. Most note worthy, residential and commercial real estate are selling at more than 35 and 25 times their rental yields.
To conclude, it is foolish to rely on interest rates will be lower for much longer and that there is no fear for a sharp and powerful reversal.
Is it worth while considering fixing your home loan?
A few lenders offer fixed interest rates below 4.00% for terms of 1, 2, 3, and even for 4 and 5 years. Therefore, a 3.80% or lower 3 year fixed interest rate is of exceptional value.
What is the Yield Curve Implying?
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) – seems likely interest rates will be steady.
(ii) Medium Term (12 months) – seems likely interest rates will be steady to higher.
(iii) Long Term (3 years) – seems likely interest rates will be higher.
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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)....
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