Long-bonds buys a sign of rates peak

MORTGAGE holders will be relieved interest rates are within sight of their ceiling, given ongoing cost-of-living pressures.

On the other side of the back fence, however, savers should be thinking about locking in a portion of their money at the highest rates in 12 years.

Whether the peak is reached later this year with a final increase from the Reserve Bank of Australia or early next year is the only unknown ahead of the inevitable rate cuts.

A series of recent signals from the money market provide the clues to what happens after two years of rates rocketing higher, hurting borrowers and pleasing savers.

The first hint that a peak is close came earlier this month in a spectacularly successful auction of Australian government bonds.

A stampede of professional fund managers bought $8 billion of ultra-long bonds (31 years) yielding an interest rate of 4.93 per cent, slightly more than the traditional long bond (10 years) currently yielding 4.79 per cent.

But what surprised everyone, including the Australian Office of Financial Management, which offered the bonds, was the fact that $20 billion had to be returned to applicants.

Oversubscription to bonds issued by the government’s finance arm is nothing new but what happened with the latest issue of ultra-long bonds, which don’t mature until the year 2054, was remarkable in that $28 billion was offered when only $8 billion was required.

It was also a clear sign that the people who manage huge dollops of cash recognise a change is coming and now is the time to lock-in high rates.

New RBA governor Michelle Bullock has given nothing away when asked about the future direction of Australian interest rates but has warned about the effects of shocks to the global economy from the war in Gaza and rising oil prices, which are feeding inflation.

Her view has left open the possibility of a 13th interest rate rise in the cycle being delivered on Melbourne Cup Day, November 7. However, unless the betting on future rate moves is hopelessly wrong, that cup day hike should be the peak.

What keeps Ms Bullock on high alert is the challenge of forcing inflation down before it becomes embedded in the community.

“We have to be very alert to it, and we have to tell people that if inflation continues to be higher than expected, and the risks are on the upside, then we’re going to have to respond with monetary policy. That’s what we need to make people understand,” she said.

But, if the RBA does raise rates in early November it will almost certainly be the last before they start falling, as can be gauged from overseas events.

In Britain, where the economy is not performing as strongly as Australia’s, there are clear signs of a downturn in interest rates, with National Savings (the old Post Office Savings Bank) recently withdrawing from the marker a one-year bond offering a 6.2 per cent interest rate.

Consumer-focused funds manager Hargreaves Lansdown has been telling clients that the end of high rates is in sight. Sally Coles, a broker with the firm, said “there is every sign that we are past the peak”.

It’s a similar story in the US, where the Federal Reserve is reported to be split on the next rate move. And while a majority of the bank’s decision makers believe one more increase might be required, there is clear dissension in the ranks.

Patrick Harker, president of the Philadelphia Federal Reserve, wants to wait until early next year to assess whether high rates have cooled the economy sufficiently.

In Australia, safety-conscious savers can today get close to 5 per cent. The Commonwealth Bank has a special offer for 12 to 23 months at 4.8 per cent, while Westpac is offering 4.85 per cent over the same duration. Second-tier deposit takers such as Judo Bank have rates up to 5.1 per cent for up to five years.

Borrowers will have to wait for relief to arrive in the new year, but savers should start looking around because the next few months will be as good as it gets for a long time.

Aged incentive

THE state government’s hunt for a solution to Western Australia’s housing shortage is not as difficult as it might seem, because the people working on the problem are the same people who did much to cause it.

Taxes are one of the obvious disincentives to building more houses, along with restrictions on land availability, while punishing stamp duty and other charges such as agent fees limit the incentive for owners of existing houses to sell.

Where the system really gums up is when older homeowners living in an empty nest (after the children have left) consider downsizing, only to find the costs of moving are prohibitive.

So, they stay, rattling around in a home that is far too big for them.

What’s happening here is also happening elsewhere, leading to an interesting suggestion floated in Britain for a ‘last home’ incentive scheme.

As the name suggests, it is the flipside of the new home incentives offered to first homebuyers.

A former British government minister, Damian Green, floated the idea of a last home incentive scheme at a political conference when he said older people in big houses might be able to sell for a lot of money but “there’s no point in selling if you can’t spend the money on something that’s convenient”.

Mr Green said there were schemes for first homebuyers but nothing to incentivise older homeowners to downsize.

“Perhaps no stamp duty if you are downsizing and releasing a big family home,” he said.

Back in the air

QANTAS has inflicted more self-harm than most companies but that doesn’t mean it’s a bad investment. In fact, after all the negative publicity it could now be one of the better buys on the stock market.

With a share price that has crashed by 30 per cent since the middle of the year after scandals that included ‘ghost’ flights – selling tickets on flights already cancelled – plus harsh treatment of customers who deserved a refund, it is easy to understand why some investors are steering clear of Qantas.

If you have a look at what the experts are advising, however, a case can be made for investing in the airline as it works to improve its reputation.

Goldman Sachs reckons Qantas can rise from recent sales at $4.70 to $8.25. Morgans is tipping a recovery to $7.30, while Morgan Stanley is flying highest with a price tip of $9, close to double where it was earlier this month.