Earlier this year, long-term bond yields began to rise as investors became convinced that the economic recovery would be stronger than expected, leading to higher inflation and therefore higher interest rates.
Shane Oliver, chief economist at AMP Capital Investors, says this narrative of rising inflation has faded somewhat recently, in part because the outbreak of the COVID-19 Delta strain has become a global setback.
However, he believes that once people are vaccinated again, market attention is likely to return to inflation and the possibility of rate hikes. This will lead to higher bond yields, which will increase the cost of bank loans and fixed interest rates.
“We will probably have a small window where fixed rates remain low for several months,” says Oliver. “There is little opportunity right now for people who are nervous because when rates eventually rise, they won’t be able to service their loans so easily.”
Another reason that fixed rates are likely to rise is that the RBA is gradually abandoning the economic stimulus pedal, lifting some of its “unconventional” policies aimed at mitigating the impact of COVID-19.
First, RBA $ 200 Billion Scheme This allowed banks to take out loans for three years at 0.1% at the end of June.
ANZ Bank Australia’s head of economics, David Planck, who saw fixed rate increases this year, said as banks spend their RBA money they will have to replace it with more expensive wholesale market funding.
Second, the RBA also pledged last year to keep the yield on three-year government bonds at 0.1 percent – another unconventional move that helped lower rates on fixed-rate loans.
However, as time passes, the date on which this promise expires and bond yields are allowed to rise is approaching.
Of course, none of these shifts will cause a sudden rise in the cost of fixed rate loans, which are still cheap by historical standards. However, all signs indicate that low rates are likely to continue to rise.
- The advice given in this article is of a general nature and is not intended to influence readers’ investment or financial product decisions. They should always seek professional advice tailored to their personal circumstances before making any financial decisions.