Ominous sign interest rates will stay high for years – as expert predicts when the next cut will be

Australian home borrowers are expected to face years of higher interest rates as government debt costs rise in the next decade.

The ominous sign of Australia’s inflation battle is found in the debt market where investors lend money to the government for a certain return.

When governments borrow money, they issue bonds also known as Australian government securities.

Investors who buy government bonds are offered fixed annual interest payments until the specified maturity date when they get their money back, which could be two, three, five or 10 years away.

These annual interest payments are known as bond yields.

To attract new, long-term investors, the federal government must now offer bond yields that are higher than the Reserve Bank of Australia’s cash rate.

This would make government debt a more attractive option for an investor than leaving money in a bank term deposit account earning interest.

JPMorgan Australia chief economist Ben Jarman expects another Reserve Bank rate hike in November, which would take the cash rate to a 12-year high of 4.35 percent, with inflation still very high at 5.2 percent.

“The money market curve suggests that rates will remain high for some time,” Mr Jarman told Daily Mail Australia.

“Our prediction has been that we will not have a reduction in rates until the end of 2024.

The forecast of bad news came as new data from the Reserve Bank’s financial stability review for October showed that mortgage stress levels had risen, with 20 per cent of owner-occupier borrowers on a variable rate spending at least a third of their income for mortgage repayments. .

This marked a huge increase from just four percent in April 2022, when the cash rate was still at a record low of 0.1 percent.

“This proportion is highest among low-income borrowers,” the RBA report said.

The RBA cash rate was kept on hold this month at an 11-year high of 4.1 percent.

But 10-year Australian government bonds are offering yields of 4.55 percent, down from 4.21 percent in September.

The 10-year US Treasury bond has an even higher yield of 4.88 percent.

Westpac senior currency strategist Sean Callow said this meant the Australian government had to offer higher yields to attract investors, who would get more back with a US Treasury bond.

“The bottom line is whether you buy a one-year, two-year Treasury or a 10-year, you’re going to get a higher interest rate in the US,” he told Daily Mail Australia.

Australian bond yields have risen since June, when the RBA last raised rates.

At the time, these yields were at 3.92 – a level below the RBA cash rate.

But they have been steadily rising, rising to 4.03 per cent in July and 4.13 per cent in August – the longest-dated first-month yields rose above the Reserve Bank’s cash rate.

By comparison, three-year bond yields were last month at 3.9 per cent, which was still below the RBA’s cash rate, and the 10-year bond yield of 4.21 per cent.

A wider gap between shorter and longer government bond yields is often a sign that RBA interest rates are expected to remain high for several years.

Mr Jarman said the Reserve Bank’s more gradual approach to rate hikes, compared with the US, meant there would be less room to cut rates aggressively later as it aimed to bring inflation back to the 2-3 percent target without causing unnecessary unemployment. growth.

“From the RBA’s point of view, they have tried to balance how quickly they get to the target against how the labor market is performing,” he said.

“So if they’re taking some kind of subtle route, then it makes sense that there’s less room for cuts as well.”

A weaker Australian dollar, now at 63 US cents, has made Australian government bonds more attractive to Japanese pension funds, particularly over the past five months.

“When you look at the biggest buyers of Australian bonds, like Japan, we’ve seen inflows from there in recent months,” Mr Jarman said.

“It looks like the falling exchange rate is helping.”

The Parliamentary Budget Office, which provides costs for members of Parliament, in June predicted that the government’s gross interest payments would rise as bond yields rose.

These interest payments were projected to increase from 0.8 percent of gross domestic product in 2023-2024 to 1.2 percent of GDP in 2033-34.

The Australian economy was worth $2.228 trillion in 2023-2024, national accounts data showed.

At this rate alone, the government’s interest payments would rise from $17.822 billion in 2023-24 to $26.732 billion a decade later.

But that $8.9 billion increase is based on today’s economy.

The increase in the debt bill would be significantly larger as the economy grew, adding billions more to the government’s interest payments.

However, Mr. Jarman said higher economic growth meant future governments could have the revenue to service the interest bill.

“If you’re using a nominal growth rate that’s above your interest payment rate, then you can afford to run deficits indefinitely, if not very large ones,” he said.

The Australian Office of Financial Management, an arm of the Treasury, issues government bonds.

The higher the yield, the lower the price of the futures contract in the secondary market for government bonds where investors buy and sell government debt obligations, also known as a fixed income investment.

Bonds from a first-world nation like Australia are considered a safe investment because returns are guaranteed, unlike riskier assets like stocks that offer higher capital gains, but can fluctuate wildly.