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March 2019 Newsletter

Long term interest rates in Australia just had a big drop

Dear Clients and Friends, 

A big hello to everyone and warm welcome to those clients for whom this is their first newsletter. It has been a while since we last sent out a newsletter and of course in that time there has been a lot of news in the papers about the Royal Commission and many changes in our industry.

 

 

However, the thing that really caught my eye today was how long term interest rates in Australia just had a big drop, so I thought I would pen a few words about it as interest rates are something that affect all of us.

Fixed interest, i.e. interest rates can be fascinating as it gives us a glimpse on how many people perceive the future. Interest rates will go up when we either:

  • do well economically, which has happened many times, or
     

  • we are very seriously worried about whether borrowers will pay us back as happened during the global financial crisis, or
     

  • when inflation goes up a lot.

Until December last year (2018) most people thought that interest rates were on a long-term upswing because things were thought to be going well. I was one of the few people who thought that interest rates were more likely to remain lower.

In December, sentiment shifted decisively negative. The US share market had been falling for two months and fell further and the Australian share market didn’t do well either. When people expect the future to be bad, they expect that shares will go down and interest rates will also go down. That is what happened.

Since then, surprisingly, in Australia share prices have gone up quite a bit in the first three months of 2019, showing that you can have interest rates coming down and share prices going up (at least for a while).

The story is also always slightly different for different parts of the world, i.e. interest rates may rise or fall more in one country than in another country.

However, last week long term interest rates had another big shift downward. 

This is great news for those with mortgages as eventually their rates are more likely to go down but bad news (in the long term if the trend persists) for investors as they will get lower returns for their investments.

As you can see from the table below:

Over the last week long term interest rates dropped a lot and short term rates dropped a little. For example Australian 10-year bond rates (a type of interest rate) dropped from 1.98% by 0.15% to 1.83%.

Two other items of interest:
  • Our interest rates are now decisively lower than US interest rates. Until recently they were always higher than US rates. This is a big change and such low rates may have a big influence on future mortgage interest rates and therefore property prices and how Australia is perceived in the world. The safer the world sees Australia, the lower the interest rates in Australia.
     

  • The other interesting item if you look at the entry at the bottom of the table is that there was a big uptick in what is called the iTraxx. That is an obscure number that measures how safe investors feel with corporate bonds (a form of company loans). The higher, the more fearful investors are. Corporate bonds are loans given by investors to big Australian companies. The higher the iTraxx, the more afraid they are of losing their money and the more expensive it is for big corporations to borrow money.


In other words, for corporations, interest rates may go up even though interest rates are on their way down.

It is a funny world.

As always feel free to contact me at any time if you have any questions or wish to discuss this or any other matter. 


Warm Regards 

Christoph Schnelle

AFP LRS Adv. Dip.FS (FP) EPA Acc. MBiostats
Life Risk Specialist
SMSF Specialist Advisor
Accredited Aged Care Professional
Accredited Estate Planning Professional
Appointed Rep 308223 – Credit Rep 402866