Fix Now or Wait ?

Good find Red....I am unfamiliar with The NEw Matilda......but Scott Mitchell is dead right about the IMF predictions, the vacuous posturings of Rudd, and how economically illiterate and left leaning media let him get away with it.
 
Unlikely - that would be v. bad publicity.

The bottom line as I see it is that both fixed & var rates are unlikely to fall much from here.
Agreed...

But that is precisely why I'm staying variable. Why would I pay a 1.5% premium to fix. I think the variable rate will stay well below the fixed for at least the next two and probably the next three years. If the real economy actually shows signs of recovery and the banks ultimately repair their balance sheets, THEN I might reconsider the upside risks to variable interest rates. Until then, its a low rate environment.

Besides, in two to three years time the improved cash flow from staying variable will have made a nice dent in my debt. And, if the economy is recovering you can bet the Sydney resi property market where I'm invested is part of that recovery.

I'm sticking with variable for now. IMHO the risk to interest rate upside in the present environment is very very low. Hyper-inflation? Don't buy it. Too much capital destruction from derivatives. The US can print til the cows come home and won't fill that hole.

As an aside, I went to my bank asking for some development cash yesterday and the senior banker I spoke to said their credit book is stuffed. Its funded 50/50 by retail depositors/wholesale markets and he said the wholesale markets are dead. He reckons credit rationing will become the norm (where's token funder?) and the funding environment is only going to get tighter as banks repair their balance sheets. His words: "If you can get the money now go for it as it might not be there in 6 months time". I said "fair enough" and handed over my application for pre-approval... ;)

Cheers,
Michael
 
May 20th Update

An update on rate expectations....

From the first post in this thread back in mid April, it's easy to see the shape & level of the yield curves for Feb & April.

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Here's todays SFE yield curve...

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There are a few significant points to note between the earlier curves and todays -
  • the trough is getting higher - back in Feb the low was expected to be a little over 2.00% and rising in April to ~2.25%. Today it's expected to be slightly under 2.75%. It's looking more likely that there will be a single 0.25% cut from the RBA.
  • todays expected cash rate for June '10 is ~60bps higher than it was in Feb.
  • the RBA cash rate is expected to be 0.75% higher than todays cash rate within 18 months. This certainly wasn't the case back in February.



And from the RBA the 5 yr bond rate for 1st Jan 09 till today. The low was 3.26% on 2nd Feb, today it's at 4.66%.

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The 5yr trend is still up. Assuming the risk premium demanded by wholesale lenders remains the same then fixed rates are more likely to continue to rise than fall.
 

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Thanks for the update Keith, maybe i am a bit more naive, but i was under the impression that if the RBA keeps rates at 3%, there is less pressure in the future to raise rates quickly.
Hence with a 3% rate, there would be a longer period of time before interest rates go above 3%, than if say interest rates go to 2% (and go to above 3% in the future). This assumes all other factors being equal.
 
An update on rate expectations....

From the first post in this thread back in mid April, it's easy to see the shape & level of the yield curves for Feb & April.

There are a few significant points to note between the earlier curves and todays -
  • the trough is getting higher - back in Feb the low was expected to be a little over 2.00% and rising in April to ~2.25%. Today it's expected to be slightly under 2.75%. It's looking more likely that there will be a single 0.25% cut from the RBA.
The trough rose until ~May7, then it descended steadily until May 18.
Only yesterday did May's downtrend reverse sharply.



  • todays expected cash rate for June '10 is ~60bps higher than it was in Feb.
From May 7-18, that rate was closing with Feb's forecast.....on May 18 there was only 15bps diff.


  • the RBA cash rate is expected to be 0.75% higher than todays cash rate within 18 months. This certainly wasn't the case back in February.

There's ridiculous variance in these forecasts.
There's more to be gained from understanding the cause of that variance.


3%20yield%20curves.gif
 
Thanks for the update Keith, maybe i am a bit more naive, but i was under the impression that if the RBA keeps rates at 3%, there is less pressure in the future to raise rates quickly.

Hence with a 3% rate, there would be a longer period of time before interest rates go above 3%, than if say interest rates go to 2% (and go to above 3% in the future). This assumes all other factors being equal.
I hold the the market in higher regard than the posters here, and certainly higher than most economists. The market has been giving us higher lows (over the next few months) & higher highs (in 12-18 months). That trend has been in place for 3 months.

ATM the market doesn't support the view that keeping the cash rate 3% will ensure it stays there for an extended period. And the market is never wrong.
 
And the market is never wrong.

Sorry keith? Did you just say that? It would be interesting to compare the accuracy of previous IR forecasts from the yield curves of recent years with where rates are now... you may find significant variance! Not to mention you could say when the All Ordinaries was over 6000 it was "wrong"! :)

Even going by WW's graphs the market was either wrong in Feb or in May regarding the future of IRs and most likely both... they can't both be right!

Nevertheless I agree it represents the sum total of everyone's activities who are prepared to put their money on the line regarding the future and should therefore be taken very seriously - doesn't mean they won't be wrong though! :eek:
 
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