Update on bank funding costs

[contrary]

I was thinking of fixing rates when cash rate gets to 2%, but I looked at yield history after other banking crissis this century. The yield trough has not actually occurred on 30 years until average 7 years after the sharemarket starts to correct. So I think I will leave fixing for another few years. I reckon everyone is expecting a quick turnaround and this is still reflected in high 10 and 30 year yields. Also the spreads on corporate bonds are still sky high. It will take a bit of time for this to work through so the trough in fixed 5 and 10 year residential mortgages may not occur for another 5 years even though the cash rate maybe below 2% or even zero.

 

[contrary]

6) I will the fix a portion of the borrowing costs for a minimum of 10 years. The larger the value of the loans, the higher the proportion will be fixed.

Who offers a more than 10 year residential loan in Australia ? I am not aware of any lenders with terms above 10 years.

 

[Rolf Latham]

wesuck do a 12

geared to the DHA market mainly I suspect

ta
rolf

 

[chilliaa]

Who offers a more than 10 year residential loan in Australia ? I am not aware of any lenders with terms above 10 years.

All my loans are with cba. Out of the fixed loans component all but one are for 10yrs. The last one was done for i think 20yrs but i could be wrong, maybe its 15yrs. On each property i will fix a proportion of the loans as insurance (basically i will only invest in residential property when the net rent covers the interest after a 20-25% deposit). At the time of settling on the last property the 10yr lending rate was going up, so the bank manager 'compensated' me by offering my a 20yr fixed loan.
From memory the first 4 10yr fixed rates were 7.18% and the 20yr fixed loan was 7.28%. They are of course pretty 'out of the money now' but im not fussed as the rent covers the loan. Also they were revalued 12-18months later with a 30%+ capital valuation which i am slowly drawing upon to invest in the stock market. The new loan drawdowns are on variable at around 5% which i reinvest in the stock market at gross ylds of around 12% (after applying a discount for current gross ylds to account for dividend uncertainty depending on the stock, its 10yr average gross pay out ratio, estimated 2yr profit forecast, debt refinancing schedule etc).

 

[boz]

an update from NAB

NAB dampens rate cut hopes
March 25, 2009 - 1:39PM

National Australia Bank chief executive Cameron Clyne says bank funding costs may continue to increase for the foreseeable futures.

Mr Clyne also indicated there was no guarantee NAB would pass on in full any interest rate cut by the Reserve Bank of Australia (RBA) next month.

He said any reduction in NAB's mortgage rates will have to take into account its funding costs in the wholesale market.

"Debt from wholesale investors, both in Australia and overseas, is approximately half the funding cost of any loan,'' he said in a speech today.

"Our funding costs have gone up and may continue to increase for the foreseeable futures, certainly through 2009.

"If we take responsible steps to address this and do not pass on the full amount of any future RBA cut, I expect to cop criticism for that.

"What that tells me is we need to communicate better and be accountable for making the right decisions.

"The challenge for the industry is to inject some transparency into the factors affecting our interest rates and develop fair, consistent principals for setting rates that our customers and the community and align with.''

Mr Clyne added: "When the RBA meets again in coming weeks, our response to any move in the cash rate will take into account the full reality of our funding costs and we will explain this clearly.''

The RBA board next meets on April 7 and is widely expected to lower the cash interest rate by at least 25 basis points to 3%, from 3.25%.

I think they are just lobbying to get pressure out of them.
In any case lately the 10 year treasury bonds has been quite high and above 4.4% today, for sure funding is not going down for the longer term fixed rates

 

[chilliaa]

Its definately not getting better,
TABCORP is issuing senior corporate bonds which will be listed on the ASX, they are of 5yr duration and to be used to repay existing bank debt. THe bonds pay floating rate coupons with indicative pricing of of 3 month bank bill rates plus a margin of 4-4.5%

Again: a margin of 4-4.5% to repay bank debt (prior to the credit crisis this might have been around 1.5%).

Read between the lines: there is still pressure on liquidity out there that a major ASX company prefers to issue bonds at a 4% premium, rather than refinance those funds from the bank. And its not because they are a junk company those bonds will be rated BBB+ which is not too bad.

 

[boz]

NZ fixed mortgages rate are rising despite the RBNZ rate cut:
link

Long term mortgage rates rise on demand and inflation fears
Mitchell Hall | Friday March 27 2009 - 08:28am

(Updated) BNZ, Westpac, ANZ National and Kiwibank have followed ASB in raising long term interest rates, because of a recent spike in wholesale rates driven by increasing inflation expectations and rising consumer demand.

Westpac is raising its mortgage rates for two years by 36 basis points to 6.25%, three years by 35 basis points to 6.5%, four years by 40 basis points to 6.95%, and five years by 50 basis points to 7.25% - bringing the five year rate into line with ASB’s.

Kiwibank is raising its three year mortgage rates by 51 basis points to 6.5%, its four year rate by 66 basis points to 7.15%, and its five year rate by 50 basis points to 7.25%.

ASB head of relationship banking James Mitchell says the five year swap rate has moved over 100 basis points since the 12th of March, around the time of the last OCR.

The movements in the shorter end of the curve (translation: shorter term rates) are less pronounced than for longer term rates.

The two year rate has moved about 80 points since 12 March, the three year rate 100 points, and the five year rate 108 points.

When it comes to being the first to raise rates, “I’m not sure being the ‘market leader’ is what we’re trying to achieve” says Mr Mitchell, “What we’re doing is pricing for what is the increase in cost of funding for us.”

ASB believes retail interest rates haven’t yet fully adjusted to the moves in wholesale prices, or where they think they’re going - i.e. up.

Consumers seem to have twigged that rates have pretty much hit the bottom of this cycle, creating significant demand for longer term fixed rates, “and that is creating a significant demand on the markets to be able to put in place the interest rate hedging behind those rates to lock them in, and that demand is forcing the price up”, says Mr Mitchell.

This means it is a domestic market issue created by the significant movement of people from fixed-rate to floating rates over the last six to twelve months, and now a significant movement back, from floating-rates to fixed rates.

Westpac media relations manager Craig Dowling says the margins are tight out there which has prompted the moves.

“Those rates build in expectations of where interest is going to be in three, four, five years, and there has been talk about inflation globally, with efforts put in place in relation to the economic stresses out there, including the printing of money in some jurisdictions.

“The long term outcome of that is expected by many to be some strong inflationary pressures – so that builds in interest rate moves upwards quite quickly out in several years time. So it’s all that sort of speculation and anticipation of the future that leads these things.”

BNZ and ANZ National have both just announced they are following suit.

BNZ GM strategy and marketing Blair Vernon reiterates the point about continued volatility in offshore markets causing costs for long term funds to rapidly rise.

"These significant increases have been reflected in our longer term fixed housing rates. Shorter term costs which are partially priced off domestic factors such as the OCR have eased, and we have decreased our 6 month rates to reflect this.”

BNZ has dropped its six month rate by 20 basis points to 5.49%, but hiked its three year rate 60 basis points to 6.59%, its four year rate 70 basis points to 7.19%, its five year up 60 basis points to 7.29%, and its seven year rate increases 70 basis points to 7.99%.

ANZ National's mortgage rates are going up 30 basis points for two year loans to 6.25%, its three year rate is up 60 basis points to 6.75%, its four year rate is up 60 basis points to 7.15%, and its five year rate is up 75 basis points to 7.5%.

Today in response the RBNZ released a very important statement (you can see that as on the market the NZ$ lost 2 cent against the AU$)
link

RBNZ says markets are reading interest rate expectations wrong
Mitchell Hall | Wednesday April 1 2009 - 10:24am

Governor of the Reserve Bank Alan Bollard is concerned that the recent spike in long-term interest rates reflects market expectations that are out of whack with the Reserve Bank’s, and wants them to get back on the same page.

Mortgage brokers and banks have been advising homeowners to lock in long term rates now, which has significantly increased demand for three to five year mortgages over the last two weeks.

This has been in response to the Reserve Bank saying rate cuts will be stopping shortly, which many have read to mean that rates will be rising again shortly – an inference not supported by the last Monetary Policy Statement on the 12th however.

"As indicated in our March Statement, we are projecting interest rates to remain at relatively low levels for an extended period", says Dr Bollard.
Overseas interest rates or swap rates have also gone up, but because the markets aren’t very liquid, the trades that have been happening are having an exaggerated effect on pricing.

The Reserve Bank also quietly thinks the markets are pricing in an economic recovery faster than what the Bank thinks in regards to rapidly rising long term inflation expectations.

The RBNZ thinks we’ll have a fairly flat economy, which will mean fairly flat inflation.

"As we said in our 12 March Monetary Policy Statement, the economic recovery is expected to be very gradual. Furthermore, the risks around the outlook continue to be weighted to the downside," says Dr Bollard.

"In these circumstances we believe the rise in longer-term interest rates is unwarranted and inconsistent with the monetary policy outlook.

The point is arguable however.

The market may well be merely processing that the amount of monetary policy and fiscal stimulus gushing into the economy is enough on its own to raise long-term inflation, regardless of the speed or strength of any recovery.

Dr Bollard says if this apparent distortion persists, it could put unnecessary pressure on the cost of borrowing by firms and households – something he is ultimately held responsible for, and doubtless not happy about

Kind of surprising the market reaction, I don't think was anything new. Australia (AU$) wasn't effected by the RBNZ announcement, but I think Australia economy wouldn't be much different then NZ economy and NZ long term interest rates.

 

[JIT]

Interesting post boz.

Does anyone else thing AUS is headed for the direction of NZ soon with long-term fixed rates?

Or is it much different here?