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Hi guys,


Just hoping to get a few opinions on CBA's recentannouncement to offer a 5 year fixed mortgage rate of 4.99%. I believe theyhave dropped the rate by 0.70%


I am currently getting 4.99% with another lender on a100% variable loan, with a linked offset account. I have recently requested a furtherdiscount from my lender, and will be paying 4.94% from next week.


I am still comfortable in a variable loan. I think rateswill remain steady over the next 12 months, with more chance of a cut than araise in this time.


I guess I am trying to analyse CBA's decision. Do they anticipatefurther rate cuts from the RBA, so they are trying to stitch up some customersby locking them in for 5 years, or have they been able to acquire cheap lendingfrom overseas markets, and this is why they are offering that rate?


I appreciate that most of you guys that I follow on here are in different stages of your lives, and wouldnt have the burden of a mortgage, but any comments would be greatly received.



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The cost of funding is falling worldwide. While some attribute 'cheap overseas money' to the Banks' ability to lower fixed rate mortgages, in reality several factors are at play:

- demand and supply (not so many new mortgages; a lot of the property market is investors (often sourcing from elsewhere) or downsizing)

- there have been declines in the long-term bond yields that serve as the benchmarks when banks source fixed-rate, as opposed to floating-rate, money. Whereas a floating-rate bond will price at a margin over a short-term 3 month bank bill rate, which gets reset every quarter, fixed-rate bonds price off long-term benchmarks with the same 3 or 5 year maturities

- the assumption that banks are cutting rates for products like fixed rate loans is only through tapping cheap overseas money doesn't fully hold up to scrutiny. Banks look for a variety of sources and seek a diversity of wholesale funding sources; money cheaply borrowed from OS has a 'landed cost' when taking into account the 'cross currency basis swap', where the fixed-rate or floating-rate money banks sourced overseas is converted into Australian dollars that can then be used to provide cash for (mainly floating-rate) borrowers here.

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A look back to 1994


In the late 1980's the US Federal Reserve (Fed) commenced interest rate tightening (raising rates) in response to an overheating economy and excesses in financial markets. Over that period the Fed increased rates by approximately 350 bps, cumulating in an interest rate at just below 10% in mid 1989.


Then in the middle of 1990 Iraq invaded Kuwait. The impact of the subsequent increase in oil prices coupled with elevated interest rates resulted in business and consumer sentiment tumbling. The recession that ensued prompted the Fed to cut rates to help stimulate the economy.


However, the cycle turned aggressively again in 1994 after the economic recovery became well entrenched. Fed Chairman Alan Greenspan raised rates from 3% to 6% over a very short period beginning in February 1994. The market was not anticipating the extent and pace of the rate hikes and resulted in US 10 year bond yields rising dramatically from 5.2% to 8%. In response to the dramatic market reaction of its policy changes in 1994, the Fed began improving its communication of monetary policy actions in 1996. Prior to this, market forecast errors were quite large and resulted in significant jumps in bond yields in response to unexpected rates changes.


The environment today


Fixed income markets are currently adjusting to the imminent end of quantitative easing and the prospect of the first hike in US rates since 2006. In this sense it is easy to understand why some investors are drawing similarities between the current environment and the situation in early 1994.


However there are many structural influences present today which did not exist in 1994 including;

ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ Highly indebted developed economies

ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ Unconventional monetary policy

ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ Lower expectations of global growth and inflation

ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¢ Significant demographic headwinds


Another key difference is the motivation behind the required rise in rates. The key driver of the rate increases in 1994 was to manage the business cycle and control the pace of the economic recovery that was underway at the time. The US was experiencing an upward trajectory in Gross Domestic Product (GDP) growth and inflation. In 2014 however, the story is very different with one of the main reasons cited for rate hikes is to break the market's psychological attachment to the zero band and begin to return markets to 'normal'.

will find a few charts at:


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Fed eve




'Twas the night before rate rise, and all through the bourse,


Not a bond yield was stirring, except junk, of course,


The economists were predicting doom, saying beware,


In the hope that Janet would help the bull, not the bear;


The investors all vested in markets seem dead,


While visions of '08 danced in their headsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ÃƒÆ’Æâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦..

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