AK brings up another good point on why there's upwards pressure on rates....and that is the flight from diluted cash as cb's run printing presses to self stimulate..... as he so wryly said a few weeks back, central banks only buy T bonds when no one else will.
5 year fixed rates thread
- Thread starter JIT
- Start date
I am dithering about fixing more of my loans to 5 yr rates largely because I'm surprised that long-term money is still trending so high. By that I mean that I'm surprised the market seems to agree on an inflation break-out to come.....Or does it? Is the price predicated on future inflation forecasts or just the current contraction in long-term money supply, or both? And, more importantly, if current interbank rates are trending down will this have a flow-on effect for 5yr+ rates (granted there will be a lag)?
Is it likely that the premium for long-term rates will stay the same or get worse in the next 2 years? I have been thinking it's a short term response to the supply issues but that's just a guess on my part. Perhaps it's a new dawn and 2-3 years from now the 5 yr rate will still demand a 1.2% premium or even more. Who's to say that by 2012 the discount variable rises to 6% but by then the 5 yr money will cost 8%?
Sorry for all the unanswerable questions. This is what was swimming around in my brain at 5am...
Is it likely that the premium for long-term rates will stay the same or get worse in the next 2 years? I have been thinking it's a short term response to the supply issues but that's just a guess on my part. Perhaps it's a new dawn and 2-3 years from now the 5 yr rate will still demand a 1.2% premium or even more. Who's to say that by 2012 the discount variable rises to 6% but by then the 5 yr money will cost 8%?
Sorry for all the unanswerable questions. This is what was swimming around in my brain at 5am...
even with the article winston posted, i do NOT see any reason whatsoever to fix the rates.... am i missing something here in the big picture
we appear as if we'll have 1 [0.5] or maybe 2[0.25] more drop, the market will bottom out in around 12-18 months and only then is there a likely chance of a turnaround... hmmmm
we appear as if we'll have 1 [0.5] or maybe 2[0.25] more drop, the market will bottom out in around 12-18 months and only then is there a likely chance of a turnaround... hmmmm
There may well be no reason for you to ever fix rates in your big picture, stockt12. Some members have multiple 6 figure borrowings and fix rates as insurance / surety of future repayments. It's not about trying to "beat" the variable rate.
I locked rates a few months back - and at a fantastic rate (4.99%) Im sure will not be repeated again soon. I too at that time thought rates may go lower but decided not to look a gift horse in the mouth - a bird in the hand is worth two in the bush.
I think if you havent locked in rates already then now is the time to do so, otherwise you may miss the boat if it hasn't left already.
People can debate all they like about statistics and trends but at the end of the day its all crystal balling the future which we have no control over. Sure, all indicators need to be considered including your own personal situation and financial circumstances. However all that will be in vain without displaying decisiveness and exercising the courage to taking action which is the key and major difference between the 'haves' & 'have nots'!.
Food for thought.
Hope this helps
I think if you havent locked in rates already then now is the time to do so, otherwise you may miss the boat if it hasn't left already.
People can debate all they like about statistics and trends but at the end of the day its all crystal balling the future which we have no control over. Sure, all indicators need to be considered including your own personal situation and financial circumstances. However all that will be in vain without displaying decisiveness and exercising the courage to taking action which is the key and major difference between the 'haves' & 'have nots'!.
Food for thought.
Hope this helps
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The RBAs McKibben has this week suggested that the budget stimulus may be to much & there's a possibility of a 'V' shaped recovery in Asia. Decoupling and V shaped recovery are starting to replace Depression in the press. The RBAs May board minutes opened the possibility of no further cash rate cuts.
Westpac is expecting to pay 120bps above swap (currently a little over 4%) for 3 yr money. Fixed rates are unlikely to fall. 2yr-15yr rates have been trending up since early Feb.
AMP expects recovery by end of 2009.
The cash rate is currently at a 40 yr low. How long could it be expected to stay there without causing inflationary pressure ? 6 months ? 2 yrs ? The yield curve currently says less than 12 months.
Yes - that's normal after the bottom of the cycle.
I'd say that's likely that the long term rates will continue to rise ahead of the cash rate.
What about the fact that all the banks are INCREASING their fixed rates?
CBA has just emailled my broker today advising that they are meeting on thursday to discuss their fixed rates, and they are likely to increase across the board.
NAB have already increased their fixed rates, as have Westpac.
Here is NABs fixed rates which we were offered in late April:
1 year 4.89%
2 years 5.09%
3 years 5.29%
4 years 5.89%
5 years 6.09%
Here's the fixed rates we've been offered today from NAB:
1 year 5.19%
2 years 5.39%
3 years 5.94%
4 years 6.39%
5 years 6.59%
... so yeah... i can see that holding out for lower fixed rates is logical
[broken record]
fixed rate swaps have been trending up for months
[/broken record]
fixed rate swaps have been trending up for months
[/broken record]
No way, I am staying variable.
Variable rates are much lower and as long as the economy remains stuffed the situation is not likely to change anytime soon...
I tend to agree......as I multi task cab merlot and making home made gnocchi.....
I am not confident a robust recovery will start next year, which is one of two reasons money is deserting cash in preference for equities and commodities. The other reason is the dilution of the dollar as central banks print more of it ad lib, and China, Japan, Sth Korea, Russia, Middle East withdraw support.
For a robust recovery to catch hold in Australia or anywhere, rates need to stay low.
Once the cost of credit starts moving up, consumers will not borrow, and will not consume.
What continues to amaze me is that many analysts don't get that recent supply and demand was propped up heavily by credit. That credit just isn't there now.
THere's not going to be the recovery many share market and commodities analsyts think.
IMHO, cash and bond yields are going up more due to a loss of faith in the USD and other currencies subject to quant. easing.....investors are moving to harder assets of finite supply - commodities and blue chips.
As many well regarded US and Euro analysts are saying, we are in for a muddle through recovery that could see asset values flat for 5+ years and even slip in value if credit tightens further.
The predominant thought in my mind is that there will be no recovery unless credit is kept relaxed. If credit tightens before or in the early stages of what looks like a recovery, then I expect Japan's history will tell all.....
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WW is very right. The great risk with all of this is we do end up like Japan, stagnation.
My sneaking fear is this recession has not provided the real pain needed to clear out the issues. I mean so far it nothing like 1990's and is meant to be the worst since 1930's come on.
So either
That is when no-one believes the USA anymore and nations start tarrif protection, unwilling to sell goods to X and Y for fear of non-payment. The $ becomes worthless and good and oil and metals become the only real value.
1930 depression which only ended with another world war.
Peter 14.7
My sneaking fear is this recession has not provided the real pain needed to clear out the issues. I mean so far it nothing like 1990's and is meant to be the worst since 1930's come on.
So either
- all the econmists got it wrong or
- we are in for something really painful
That is when no-one believes the USA anymore and nations start tarrif protection, unwilling to sell goods to X and Y for fear of non-payment. The $ becomes worthless and good and oil and metals become the only real value.
1930 depression which only ended with another world war.
Peter 14.7
OK, despite MW kudos I am no sophisticated analyst but here is my logic to fixing rates which has worked for me 90% of the time and why now is not the time to fix .
This based on investment sense and not market this and that, so I apologise for the simple thinking and hey, it could be wrong.
FIX TO
Sleep at night
Lock in good buys, so they don’t become bad ones
Lock in service costs for use in getting future loans. Banks like to know you have X years at X percent.
DO NOT FIX
If cross collateralized to death as selling one IP can force an unfix and lose the benefit and cost $
If thinking of selling in the future, divorcing, etc.
SO WHEN TO FIX
When variable rates are about to rise, not when fixed rates are about to rise.
WHY
The max benefit is in the last year of the fixed. I.E. It is not the difference between variable and fixed now that matters.... but in five years time.
GOLDEN RULE OF FIX
Fix minimum of 5 years and longer
PLEASE EXPLAIN!
Case in point: my last fixed rate was in late 2003 being 6.19% for five years. I just missed out on 5.99% and could have got 5.79% six months earlier. So missed out on 0.5% for one year but in the last year rates were 8.5% so I saved over 2%.
SUMMARY
Hold your nerve and lock for long as possible when variable rates are about to rise to get max protection from the lock period.
FYI
Peter 14.7
This based on investment sense and not market this and that, so I apologise for the simple thinking and hey, it could be wrong.
FIX TO
Sleep at night
Lock in good buys, so they don’t become bad ones
Lock in service costs for use in getting future loans. Banks like to know you have X years at X percent.
DO NOT FIX
If cross collateralized to death as selling one IP can force an unfix and lose the benefit and cost $
If thinking of selling in the future, divorcing, etc.
SO WHEN TO FIX
When variable rates are about to rise, not when fixed rates are about to rise.
WHY
The max benefit is in the last year of the fixed. I.E. It is not the difference between variable and fixed now that matters.... but in five years time.
GOLDEN RULE OF FIX
Fix minimum of 5 years and longer
PLEASE EXPLAIN!
Case in point: my last fixed rate was in late 2003 being 6.19% for five years. I just missed out on 5.99% and could have got 5.79% six months earlier. So missed out on 0.5% for one year but in the last year rates were 8.5% so I saved over 2%.
SUMMARY
Hold your nerve and lock for long as possible when variable rates are about to rise to get max protection from the lock period.
FYI
Peter 14.7
I made a xls sometime ago to do fixed vs variable whatifs.
I think the consideration often overlooked is the effect of the premium paid early for going fixed, on a net present value basis. Higher expenses earlier adversely impact NPV.
I tend to agree with Peter. Don't over-think it. Look at long term averages. When fixed rate offered is lower than long term average (which is around 7%) - go for it. NO ONE (even the experts) can predict what will happen to rates over the next 5 years. The vast majority that try to predict get it wrong.
Hi WW it may be the multi tasking
but I'm trying to reconcile these two sentences - in one case investors flock to assets (which would drive up their price?) and in the next asset values are flat...? Perhaps you are seeing the current move to assets as temporary and will soon unwind?Anyway IMO there are three possibilities:
1 Deflation - Unlikely in the face of all this quantitative easing and it would fly in the face of the determination of all world CBs to prevent it.
2 Muddle through - Most likely in which case asset prices would be supported by those investors you identify as avoiding the bond markets because the risks there have materially increased with all this govt debt everywhere.
3 Inflation - Likelihood somewhere between 1 and 2 above as this would require most to be quite wrong about the depth of the recessions we are facing world wide and all these -ve GDP numbers would be just a "temporary blip" in the face of easier credit. Given the amounts of debt we all seem to be in the provision of cheap extra credit is unlikely to trigger an inflationary boom, although the yield curve would imply that's what most people are afraid of at the moment.
I'll be sitting this one out until I seem some evidence of this inflationary boom and will be building offsets with the (significant) current differential so that if and when high IRs come there will be less principal to apply them against...
Like mine, that's just a matter of opinion. Same as I prefer to not fix all loans. I dont fix rates for cash flow reasons, rather risk minimisation. Everyone is different. No right or wrong way. Just different ways from which we can structure the best option for our individual financial positions, time frames & goals.
Hi WW it may be the multi tasking
I mean money (including swfs, pension funds) is flocking to non cash assets, like equities and commodities.
And the exit from cash assets, which includes govt bills, notes, and bonds, pushes up their yield. That puts upwards pressure on the cost of wholesale funds to banks.
Anyway IMO there are three possibilities:
1 Deflation - Unlikely in the face of all this quantitative easing and it would fly in the face of the determination of all world CBs to prevent it.
Many are saying QE isn't doing what it is supposed to because US and UK banks are not letting it flow through. Rather, they are just using it to fix their balance sheets and play the stock market and commoditiies again
And they are keeping credit to consumers and corporates tight. Further, households are scared of rising unemployment, so even where credit is loose, they aren't taking the bait. (FHBs have taken the bait though)
2 Muddle through - Most likely in which case asset prices would be supported by those investors you identify as avoiding the bond markets because the risks there have materially increased with all this govt debt everywhere.
The big end of the globe is more concerned about preserving capital value, and the risk posed by QE to cash value is getting too high....just look at what has happened to the USD since Obama announced the last round of QE. There's been a run to commodity currencies with lower deficits, debts, and high commodities, like Canada, South Africa, and to some extent, Australia. It seems internationals don't weight Rudd's domestic QE stuff that heavily currently.
3 Inflation - Likelihood somewhere between 1 and 2 above as this would require most to be quite wrong about the depth of the recessions we are facing world wide and all these -ve GDP numbers would be just a "temporary blip" in the face of easier credit. Given the amounts of debt we all seem to be in the provision of cheap extra credit is unlikely to trigger an inflationary boom, although the yield curve would imply that's what most people are afraid of at the moment.
There's heaps of analyst criticism of the yield curves currently. As I said above, QE could be the major impetus for the flight from cash, and not a legitimate belief in the economy recovering strongly next year.
The real gotcha with inflation imho, will be the price of oil, though most analysts agree oil producers will not cut production because they are strapped for cash.
I'll be sitting this one out until I seem some evidence of this inflationary boom and will be building offsets with the (significant) current differential so that if and when high IRs come there will be less principal to apply them against...
I agree with your last bit. I just can't see the fundamentals are strong enough to drive rates up steeply next year, as the yield curves suggests......
And the point of special interest I have is in what happens to global credit supply. As I've said on Somersoft for months, Australian property prices can no longer be sustained by domestic productivity and savings.....the prices are so high that we are critically dependent on foreign credit to sustain today's prices. This is why I am trying to understand global capital flows and credit supply more. And I am also interested in Australia's growing net foreign liabilities, and the interest paid for that, that goes offshore. Many say this is unsustainable.....and I see this as putting a very low ceiling on any medium to long term property growth.
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Why do you say it cost you 0.5% for 1 year ? Didn't it cost you 0.5% extra for each year of the full 5 yr term ?
Aren't you disagreeing with Peter ? - he says take advantage of low var rates, wait till the variable rate rises & then fix at a relatively high rate for 5 yrs & hope that in the final year of the term the var rate is significantly higher. In fact higher than the sum of both 5 yrs of higher fixed rate & the difference between the fixed & var rates at the start of the term.
However, by the time the cash rate rises, fixed rates will be well above the long term average. They're already ~0.5% above where they were 2 months ago when they were well below the long term average.
I agree, however the balance of probabilities suggests that both fixed & variable rates will on average be higher than their current historical lows.
More details required. Sorry.
Approximately from memory.
FIXING cost me:
0.5% in the first year.
2nd year broke even
3 year saved 0.5%
4 th year 1.5%
5th year saved me 2% plus
Thats is variable rates were around 0.5% less than fixed. At the moment the diff appears to be around 0.75% for five years.
So my point is, if you fix now at 0.5% above for five years instead of waiting and fixing at say 1% above for five years, you actually are losing 0.5% until rates rise. And to make matters worst you are losing the end years where the saving is the greatest.
Once rates rise, the premium gap for fixed disappears very quickly (from experience 6 months to 1 year) so the loss, whilst higher, as a percentage is lower as a $ because you
a) saved being lower variable during the low rate period
b) the tipping point when you are ahead arrives quicker
You could of course fix now for ten years but who knows where we/rates will be at in ten year?? Again had I taken 10 years in 2003 at 6.19% (assuming I could) I would have been great until late 2008 and now would be costing me money and coming out of fixed in 2013 when rate are expected to be higher.
In the end it is a bit like $ cost averaging for shares.
Regards, Peter
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