20/11/2020 - 14:00

Rates worth watching

20/11/2020 - 14:00


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Moves in the US could signal a shift in direction for interest rates.

Rising rates might put pressure on mortgage holders, and those thinking of buying. Photo: Gabriel Oliveira

Western Australia’s red-hot residential property market is making a lot of people feel richer and those left out of the market anxious about missing the boat.

Of course, those on the outside could sign up for a monster mortgage; but while that decision might look good today, it could prove painful when interest rates rise, which they’re starting to do in the US.

The upward move in rates is, so far, confined to the professional market for 10- and 30-year US Treasury bonds (or notes in the case of the 10-year instrument) and has only been evident for the past three months.

Two other points that might comfort Australian borrowers is that the uptick in rates appears to be confined to the US bond market, and the moves are tiny in absolute terms.

The 10-year note, easily the world’s most important interest rate for medium-term debt, started rising in early August.

The first ripples – an increase from 0.54 per cent to the current 0.857 per cent – were felt in a market close to the heart of WA business, because rising US rates have a negative effect on the price of gold.

The world’s premier long-term rate – the 30-year bond – also edged higher in early August, from 1.19 per cent to 1.623 per cent.

What’s lifting US interest rates is a combination of economic, political and community health issues, with the bitter presidential election campaign forcing investors into safe havens such as fixed interest bonds.

There are also indications speculators are playing the bond market, because there is more chance of a future rise than a fall, as rates are already close to the floor.

Gold has reacted to the rise in US rates because it too is a safe-haven asset.

But it doesn’t pay interest in its bullion form, which means when rates are ultra-low it might make more sense to buy gold than park money in a US Treasury bond.

The case for gold is especially strong when official rates slip into negative territory, which might have been the case in early August after allowing for the effects of inflation.

What’s particularly interesting in the gold versus rates argument is that the very low 10-year note rate of early August (as well as the 30-year bond) coincided with gold selling at an all-time high on August 6 of $US2,067 an ounce.

However, as rates have edged up, gold has edged down.

Multiple factors drive interest rates and gold, and it might be premature to forecast a long-term change in the overall downward trend in official rates, which has been evident for more than 20 years.

Prudent corporate and private borrowers will, however, be looking at what’s happening in the US as it settles down after the presidential election, with markets trying to price in the effects of another increase in US debt to meet the cost of COVID-19 and the ongoing trade war with China.

If there is a message in the US situation for Australian borrowers it’s to start thinking that interest rates today could be as low as they’re going, and it might be time to lock in your mortgage in case there is a significant upturn.

Casualty of war

On the question of China, it’s not just WA Premier Mark McGowan who is demanding an urgent fix to Australia’s poor trade relationship with its biggest customer.

Some US economists are alarmed about what the trade war has done to the economy in that country.

Rather than bolstering Donald Trump’s claims that attacking China economically would help the US, the exact opposite seems to have occurred.

According to a recent report in London’s Financial Times newspaper, a high-powered study has revealed that the trade war has cut the stock market value of US companies by $US1.7 trillion.

That analysis of the damage comes from a joint research project of Colombia University and the New York Federal Reserve (an arm of the US central bank), two of the most highly regarded institutions in the country.

As the Financial Times story noted, Chinese retaliation against Mr Trump’s trade war has wreaked havoc on US exports, with US companies forced to accept lower profit margins on their exports.

In turn, this has led to lower wages, job losses, and higher prices for US consumers.

A promised increase in revenue from higher taxes and tariffs on goods imported from China has not materialised, adding to a view that the US has been the bigger loser from a trade war it started.

Australia can learn a lot from what has happened in the US, with the most important lesson being that it’s impossible to win a trade dispute with your biggest customer.


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