DOVISH RBA DISAGREES WITH THE INTEREST RATE SWAP MARKET


The Reserve Bank (RBA) Governor, Philip Lowe, whilst addressing the Anika Foundation on 14 September 2021, had a go at the Interest Rate Swap (IRS) market because of differing views on the expected path of the official cash rate.

Lowe finds it difficult to understand why rate rises are being priced in by the IRS market, whilst the RBA is adamant that interest rates will not rise until at least 2024.

Strewth! All Lowe has to do is to keep on printing money, buying at least $4 billion bonds each week (down from $5b last month), supressing the April 2024 Commonwealth Government bond at just 0.10% yield, and lending almost free money to the banks at 0.10%, so the banks can make even bigger super profits.

In the meantime, the IRS market has to content with the biggest bubble in human history being the bond market, negative interest rates, negative real yields (the difference between bond yields and inflation), inflation, and importantly counterparty risk.

Fade the narrative. Keep an eye on the 10-year Commonwealth Government Bond Yield (currently 1.25%) and particularly the 10-year USA Treasury Note (1.33% currently) because the bubble will burst here first, followed by the stock market, housing market, and all other risk on assets.

The graph shows the market expectations of the official cash rate compared to the Reserve Bank’s.

In a zero-sum game, where one wins and the other loses, the IRS market cannot afford to get it wrong, because if they do, and dare to print money they may end up in jail.

The IRS market is often far more correct than economists are. Ditto with the RBA.