16 June 2009

Australian yield curve and mortgage rates

Below is a short commentary on mortgage rates I received from Jackarine Ludwig of Aggregated Awareness:

The Mystery Behind the Parabolic Yield Curve is a nice report by Gary Dorsch, an American chartist I follow. Rarely does Australia get a mention in his reports. It is good that he's done so now. His charts a good, because they tie in with political & economic events.

Although I don't see the rise in the Australian yield curve as a mystery. And whether Wayne Swan wishes to call it the fault of the 'bond vigilantes' in the US Debt markets or not is irrevelent. Fact is, China is the biggest foreign holder of bonds, both from the US and elsewhere, including Australia. It is obvious that they are the 'bond vigilantes' which Swan refers to.

Regardless, it makes perfect sense from a fundamental supply/demand equation, that more supply would reduce prices, so I don't know what Swan is complaining about? Under his, Ken Henry's & Kevin Rudd's command, the Treasury is going into record setting hock mode for the foreseeable future. By 2012, this government has projected a total deficit of A$300 billion. You read that right, that's billion with a B. What did he reckon was going to happen? Bond Prices to rise & yields fall when he was getting involved in issuing more bonds? HaHaHaHa...What a fool. It is obvious to anyone with a brain, that more Australian bond supply would reduce bond prices & subsequently increase yields. Nothing conspiratorial there Mr. Swan.

If you wish to follow the short & long end bond yields of Australia, US & UK, may I suggest this site. It is updated daily.

Now if you didn't think bond yields are important, then you have obviously never borrowed any money or paid any taxes. If you have borrowed money or paid taxes, then I can say that the yields on 3 year Aussie Treasury bonds, sets the mortgage rate for 3 year adjustable rate mortgages, and the 10 year Aussie Treasury bond sets the rate for longer term mortgages, the 7 year, 10 year or 15 year fixed rate mortgages. And these yields are the interest paid by your tax dollars toward those creditors who have purchased these bonds, both domestic & foreign.

For mortgages, the normal rule of thumb is that banks add 2.5% to the price of these bonds to come up with the mortgage rates. Although lately, because of the rising bond yield, and the fact that it's politically unpalatable to raise home loan rates at the moment, the banks have been copping the bond rate increases and not passing it onto retail borrowers. Therefore, in the past month, banks have not been adding 2.5% to bond yields to calculate their mortgages, but more like 1.7% for the 15 & 10 year fixed mortgages. But I read a story yesterday that said that CBA were looking at raising rates again, but having just gone to their site we can see that they haven't raise them yet.

I received this commentary on Friday and now a number of Aussie banks have moved their rates up in between RBA moves, which is unusual. Maybe the first indication to the average Joe that the Government is not some all powerful economic lever puller who can make it all OK?

1 comment:

  1. Wayne (and others) remind me of when I was teaching my kids to throw a boomerang. After learning to successfully launch the boomerang, the second lesson was learning to duck and dodge the thing !
    Wayne and just about every other Treasurer in the world are still learning the second lesson. Wayne's ducking and dodging looks particularly inept however. He has placed us in the sovereign debt markets where competition is fierce. Even the US will learn that they need provide a much improved return for the perceived risk. Australia will need to match and exceed US rates. Aussie banks will take that a step further. Goodbye Aussie housing market, goodbye Aussie small business (the major employer in this country).