Australian interest rate markets are in a bit of a funk at the moment as the market moves to price in rate hikes in the next year or so. Today 90-day bills are up 3-5 basis points while 3 year bond futures are up 5 points.
What’s driving this sell-off over the past couple of months in 3 and 10 year bond futures is the emergence of an expectation that the RBA thinks official cash rates at 2.5% are low enough which has coincided with their constant requests for the Aussie dollar to fall.
Then there’s the taper talk in the US and the impact that is having on interest rates around the world.
Looking first at the longer rates we can see that even though Australia has had a much better economic performance during the past 5-6 years than the United States it still seems to be the US 10 that is the primary driver of Australian 10 year rates with a very strong directional correlation.
But its not just the longer bonds expectations about short term rates are also on the rise. The table of charts below which I received this morning from Police Bank in Sydney (where I am a Director) tell the story in the short end of the curve.
If you look at the bottom left chart you can see that over the next two years 90 day bank bill rates which are the benchmark short term market rate after the cash RBA’s cash rate are expected to rise back toward 4% (from the current 2.5%)
But the stark shift in expectations about interest rates in Australia and in particular of interest to home owners is the big jump in the 3 year swap rate which is used to set 3 year fixed rate home loans at top right.
In 1994 the Fed unexpectedly increased interest rates and bond markets around the world had a meltdown.
In communicating since May that it is planning to reduce bond purchases — the taper — Fed Chairman Bernanke is trying to avert another bond market crisis.
But with US 10’s hitting 3% overnight and Australian yields under so much pressure even though the RBA still seems inclined to ease rates if the Aussie dollar doesn’t fall the bond markets vigilante’s risk choking of the globes emerging economic resurgence.
Here at home any chance that households will start spending again soon just might be choked off it they notice these moves any time soon.