If I have a surprise and astonish look on my face is because when most consumers decide or are advised (by brokers and branch lending experts) to stay variable or to fix, they unwittingly punt blindly with extraordinarily little information, on the future direction of interest rates.
What is happening: The mood of the bond market has changed by a daylight since our last update on 30 September 2020.
What you need to consider: Fixing your home loan interest rate should be actively considered based on your personal and financial circumstances.
The above chart compares the performance of the 5-year fixed rate to the variable rate since 1990. We also number crunch for 2, 3 and 10 years.
How to Interpret the Chart: At any point in time, if the green line is below the blue line then it would have been better to have fixed rather than stay variable. The difference between the green and blue lines is the implied savings if you fixed (and vice a versa).
Red line is the variable interest rate applicable at that point in time.
Green line is the 3-year fixed rate applicable at that point in time.
Blue line is the variable interest rate paid at that point in time over the 3-year comparison term, calculated on the variable interest rates applicable over the 3-year term.
Home loan fixed rates are suppressed: The Reserve Bank (RBA) is gifting the ADIs (Approved Deposit Institutions) almost free money at just 0.10% for 3-years, and in turn the ADIs on lend to consumers at home loan fixed interest rates of about 2%. The net interest rate margin that the ADIs make (other than processing and maintaining your home loan account) is a staggering approximately 2% margin. But if it were not for the RBA’s yield control, money printing, and billions of dollars of monthly bond purchases, home loan fixed interest rates would be much, much higher.
What matters is the 10-year bond yield: This is the bell-whether benchmark interest rate of the world (the most significant is the US 10-year Treasury Bond) that is beyond any central bank’s yield control measures, including the RBA’s Cash Rate and 3-year bonds yield curve control.
Why it matters: On 26 February 2021, the Commonwealth Government 10-year bond yield hit 1.98%. On 9 March 2020 it was just 0.55%. It quadrupled in less than a year. And the bond market is usually correct. But what is it telling us?
Home loan fixed interest rates would have risen if they were not being suppressed: Usually lenders price their home loan fixed interest rates from the Interest Rate Swap yield curve plus a funding cost margin based on their credit rating plus/minus other factors.
The 3-year swap rate hit a low of 0.06% on 6 November 2020 and on 26 February 2021 closed at 0.36%. But wait a minute, isn’t the short end of the yield curve under RBA yield curve control?
The 10-year swap rate hit a low of 0.64% on 6 October 2020 and on 26 February 2021 closed at 1.94%.
These movements are not (yet) reflected in the home loan fixed interest rates because of the RBA lending the ADIs 3-year money at just 0.10%. if they did not, then home loan fixed interest rates will be much, much higher.
The debt bubble: World debt is now over USD$281 trillion, and its debt-to-GDP ratio rose to 356% in 2020.
What do the 10-year bonds fear the most: The hyper-massive monster debt bubble will eventually implode on an epic scale sending bond yields uncontrollably higher, not only fuelled by the debt-bubble but by more printing by central banks (this is what they may only want us do know. Does anyone know who audits the Federal Reserve?), more borrowing and more spending by governments.
This will in turn implode the stock market: If you doubt this, then consider - on 16 February 2021, the SP500 hit a new old time record high of 3,950.43 (fuelled by cheap money despite the US being in an economic collapse) when the 10-year Treasury Bond was at 1.32%. On 26 February 2021, the SP500 put a low at 3,789.50, down 4.1%, when the 10-year Treasury Bond incrementally and steadily hit a high of 1.56%. This has caused anxiety in the stock market. Imagine where the SP500 will drop to (how about a fraction of what it is today), if the 10-year US Treasury Bond yield uncontrollably with increasing volatility hits 3% or higher.
The housing market will also implode: It is unsustainable that the need to put a roof over your head, is exchanging hands at circa 1.30% net yield when a few years ago it was much, much higher.
So, what is the solution: The central banks led by the Federal Reserve better have contingency plans to keep the financial markets from freezing (much, much more super hyperbolic printing and bond buying, i.e., they will need to own almost all bonds), because if they fail to do so, it may well be much, much worse than all the bubbles put together.