Fixed Rate Home Loans Are Closely Aligned to The Bond Markets

Ocker on 27/02/2021 - 19:17
Last edited 27/02/2021 - 19:28 by 1 other user

With the long end of the bond market getting trashed and the price falling hard and fast, intending borrows should watch the market closely as all bank fixed rate loans are closely aligned to the bond markets.

The 10 year yield has increased by about 1pc (to about 1.95%) over recent weeks, albeit the near end (2 year) is pretty stable at about 0% thanks to the RBA holding the cash rate at 0.1%. Just bear in mind the market are forward looking and to my mind the signs are the market believe we have seen the bottom in yields.

No reason to panic (just yet) because as long as the RBA holds the cash rate then shorter term fixed rates should not change. I dare say the RBA would love to hike the cash rate to take the heat out of the housing market!

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  JimmyF on 27/02/2021 - 21:00

  ok. Thanks for the market update.

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  deme on 27/02/2021 - 21:01

  Cool story bro

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  Donaldhump on 27/02/2021 - 22:06

  I dare say next week the rba lowers it even more.

  The again maybe not, fixed will prob rise next month or two.

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  netjock on 27/02/2021 - 23:28

  Typically written by journalists who have no idea how the markets work.

  When you take out a fixed rate loan the bank actually does a "swap". Essentially you are giving the bank security of term and they are securing that term using "swaps" (basically like a contract for differences but because they have the risk to be secured it isn't a gamble).

  Markets are forward looking but it doesn't necessarily mean they are wrong. Markets are full of bulls and bears. Markets have been wishing rates go up for a long time so bank shares can have good run. Higher the cash rate means higher the interest rate. If bank margins are 1.9% at 0.1% cash rate, if cash rate went to 2% + 1.8% is a lot more simply due to compounding nature of interest.

  You just have to look at 2009/10 how low rates went in US then how high it went in 2018 before the share market totally threw a spasm.

  If central bank rates went up 3% how many governments would go bankrupt and how many people would go bankrupt. You might as well blow up the capitalist system and go to Communism because there would be so many people living on the streets it isn't funny.

  The best central banks can really do is to say they are raising rates 0.25% every 6 months until they get to 3% regardless. At least people have fair warning and the end goal.

  Problem at the moment is all the addicts to zero interest rates who suffer from massive withdrawal symptoms if they think rates are going to go up by 0.25% and their hit is going away. Just the movement in the bond markets in the last week has sent the stock market down 3 - 4% (depending on which markets you are looking at). Imagine if they are going up from 0.1% to say 3%, 12x 4% drop in stock market is 48% (basic math) but obviously not that much as there is some stocks that are well supported by dividends. It is also the reason why tech stocks are down because they don't pay dividends and people buying on margin (paying interest) suddenly either gets out or cost of holding it goes up.

  Someone on here is going to talk about the stimulus and inflation. Stimulus has gone mostly into assets, because RBA buys bonds, banks have money and banks like to do secure lending like houses, commercial property, cars etc. Not food stuffs like loafs of bread. So unless you need to buy a house or bitcoin you are fine because the 600g loaf of bread isn't going up in price by 10% overnight.

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    Donaldhump on 28/02/2021 - 00:10

    So what’s your outlook on fixed rates

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      netjock on 28/02/2021 - 13:13

      It will not go up significantly for at least a decade as governments try to pay off the debt.

      How governments are going to pay it off is raising taxes. Already communicated in the UK they are raising company tax and capital gains tax. There is no magic money.

      Look at the graph. As interest rates have come down the increase in house prices and share market. Assume that if rates go up then house prices and share markets fall then consumer spending seizes. The economy is stuffed. Our salaries might he higher but if interest costs increase for companies to maintain their profits means resisting salary increases.

      No easy way out.

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    Ocker on 28/02/2021 - 08:19

    I am not a journalist, rather an individual with some 30 years working in the global financial markets and several of those in balance sheet management for a major international bank

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      netjock on 28/02/2021 - 12:50

      Well it is just lazy piece isn't it.

      You've done decades for major banks and balance sheet management. We know how well you've helped.

      The problem is banking people are institutionalised. They go through the I am so good I work for a bank, then they learnt a few things and become always right, lastly inability to accept they are wrong.

      I've worked for the biggest names in financial services, FMCG, telcos, gaming & hotels, utilities, property and logistics here and abroad looking after their P&L and balance sheets.

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        Ocker on 28/02/2021 - 20:12

        -2

        Boy, does your response display a total ignorance of the facts!
        But seriously, I do doubt your credentials of knowledge about the basics of balance sheet management.
        That is your P/L claims of responsibility in reality is to look after influencing events that have already happened.
        Proper balance sheet management is to match the interest rate profile of assets and liabilities, and compare this with the interest rate curve vis'a'vis the institutions appetite for risk, and also forward rate projections.
        A very complex task that requires several skills across global market experience - the more years the better

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          netjock on 01/03/2021 - 15:51

          @Ocker: If you have a crap P&L then it doesn't matter how good your balance sheet is. Still going to go bust one day. People like Donald Trump probably had Trump Taj Mahal (Atlantic city casino) on the balance sheet but it wasn't worth that much considering it went bankrupt.

          Proper balance sheet management is to match the interest rate profile of assets and liabilities

          You mean what I said about customers engaging in a fixed rate mortgage then engaging in a swap to hedge the risk over the life of the fixed rate.

          You probably demonstrate quite well the banking industry who believe they are masters of the universe and it some kind of magic money machine. The funniest thing is banks that get themselves into trouble are those who were allowed to use their own risk models because they are generally more aggressive risk taking than the regulators.

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            Ocker on 01/03/2021 - 18:52

            -1

            @netjock: Sometimes there is no point in trying to have a constructive commentary/discussion for the benefit of the OZB community with someone who biased in their views.

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              netjock on 02/03/2021 - 03:16

              +1

              @Ocker: Okay if you think to end the argument is to say someone is biased. I guess the banking industry is always right until they aren't. Time and time again it is proven to be ripping off customers.

              Yeah I sat in a compliance course at a bank once and I almost laughed through the 2 days of it because all the stuff they pointed out was wrong doings I am sure it still happens in the bank, just small scale so nobody finds out.

              See CBA getting a class action for junk insurance policies. Book the profits, deal with the fall out later. UK's been through the same thing. It is called PPI (Payment Protection Insurance). The banks have paid back many time over what they earnt in selling the junk. Look at AMP and their no fee for service.

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  whooah1979 on 28/02/2021 - 06:35

  The 10 year yield has increased by about 1pc

  Bond yield move by 1pc and people start losing their 💩. Clam down, take a seat and breathe.

  https://www.afr.com/markets/debt-markets/momentous-day-as-au…
  Momentous day' as Aussie 10-year bond yield drops below 1pc

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  El-Rhi on 28/02/2021 - 13:10

  +1

  10 year government bond has no real impact on mortgage pricing. When you start to see less than 5 year bonds move up in rates then this will start to flow through to fixed rates since the longest fixed rate mortgage is 5 years.

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  Ocker on 01/03/2021 - 18:58

  How right you are!
  I wonder when the Aussie market will start to offer 30 year fixed rate loans as in the case of the USA?
  Such a fixed rate term would find takers on the other side of the ledger, such as insto's and individuals looking for security of income.
  As an aside, I do recall that back in the late 80's the Disney Corp took a 100 year USD fixed rate bond issue to the market and it was over-subscribed!

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    netjock on 02/03/2021 - 03:11

    I wonder when the Aussie market will start to offer 30 year fixed rate loans as in the case of the USA?

    We won't UK banks are hardly doing 10 years. 30 years there is a catch which is much higher rates. Not because interest rates are necessarily higher but you have the risk of uncertainty of interest rates priced in.

    Such a fixed rate term would find takers on the other side of the ledger, such as insto's and individuals looking for security of income.

    No individuals would be that stupid. Institutions would do it because they will still make a management fee even if they lost people's capital.

    As an aside, I do recall that back in the late 80's the Disney Corp took a 100 year USD fixed rate bond issue to the market and it was over-subscribed!

    What was the interest rates in the 1980s? If you bought bonds at current rates you won't live off your capital very long considering the yield.