[cobran20]

Will this impact the RBA's decision in September?

Bond Risk at Two-Year High as S&P Spurs Rout: Australia Credit

Quote

Aug. 9 (Bloomberg) -- Standard & Poor’s says Australian bonds are less risky than U.S. debt. Credit-default swap investors say the opposite.

Contracts to insure the government bonds of AAA-rated Australia against default rose 10 basis points to 81.3 as of 5:01 p.m. in Sydney today, the highest level since May 2009, according to data provider CMA. Swaps on Treasuries rose 1 basis point to 56.3 yesterday, according to CMA, after S&P cut the U.S. to AA+ on Aug. 5.

Quote

The extra yield investors demand to hold Australian corporate bonds instead of sovereign notes held at 186 basis points yesterday, the highest since Jan. 31, according to a Bank of America Merrill Lynch index.

Kangaroo Bonds

A gauge of banks’ difficulty in raising funds rose to the highest level since January 2009. The gap between the interest banks pay to borrow from each other for three months and swaps that track expectations for the RBA’s benchmark rate reached 61 basis points.

The U.S. downgrade will affect Australian credit markets if kangaroo bond issuers whose ratings are supported by the U.S. sovereign’s grade are cut, while local companies face currency volatility, Royal Bank of Scotland Group Plc credit analyst John Manning said in a research note yesterday.

[cobran20]

AK's contribution for tonight's ABC news implies major cuts ahead.

[cobran20]

NEWS: Don't bet on the Reserve Bank cutting interest rates

Quote

HOMEOWNERS have been warned not to bet their house on the Reserve Bank slashing interest rates, amid predictions of a property price crash by Christmas.
ANZ chief executive Philip Chronican said high inflation in Australia was likely to keep rates stable in the short term, reported the Herald Sun.

"We've got a domestic economy that's very strong and the Reserve Bank is worried about inflation," he said.

"There's very little reason for them to cut rates other than the crisis of confidence that we're starting to see in the rest of the world."

The bank's cautious outlook comes as leading US economist Harry Dent said Australia's real estate market was the most overvalued in the Western world.

He said that Australia's property market could follow a similar path to Japan's crash in the late 1980s, when housing prices there declined by 60 per cent.

"That's what Australia could be looking at. I think prices will go back down to where they were in mid-2000, to where young families can start affording a house again - so that could prove a good thing."

The debt problems facing the US and Europe has led money markets to price in a cut of 1 percentage point in the official Australian cash rate by the end of the year.

Westpac last month forecast a 1 percentage point rate cut by the end of 2012.

A cut of that size would save struggling families $200 a month in average monthly repayments on a $300,000 loan.

But Commonwealth Bank chief executive Ralph Norris said last week that even if the Reserve Bank cuts rates, interest rates could jump as international borrowing costs climbed.

All four major banks slashed their fixed-rate mortgages over the past week. ANZ's three-year fixed rate plummeted to 6.44 per cent, ahead of CBA at 6.59 per cent, NAB at 6.69 per cent, and Westpac 6.79 per cent.

Mr Chronican said that less than 10 per cent of new loans had fixed interest rates, with most Australian borrowers opting to ride out the peaks and troughs of the variable rate.

Charities have blamed mortgage stress and cost of living pressures for a 12 per cent rise in demand for financial and emergency relief.

The Australian Council of Social Service community sector survey, released today, showed charities were called on for assistance 6.2 million times in 2009-10.

Fitch Ratings report released in May found a 30 per cent increase in arrears on mortgage payments during the three months to March this year.

More than 400 repossession notices were served on home owners by lenders in May and June, the highest number for almost two years.

[tom]

Quote

ANZ's three-year fixed rate plummeted to 6.44 per cent, ahead of CBA at 6.59 per cent, NAB at 6.69 per cent, and Westpac 6.79 per cent.

wow, 6.44%, that is cheap.

that is less than Ubanks deposit rate! Too bad they do not offer a three year deposit at 6.51%...

Then again it is a pretty small margin to chase.

1million x .07% = $7,000.00 per annum or 21,000.00 over the three years.

Still better than a kick in the pants but you would need to be a solid borrower to get it over the line? Would they take the deposit as collateral?

[zaph]

tom, on 15 August 2011 - 02:36 AM, said:

Still better than a kick in the pants but you would need to be a solid borrower to get it over the line? Would they take the deposit as collateral?

huh? they'd take a deposit as a deposit.

oh i think what you're saying is would they take a term deposit as collateral on a loan (eg you're thinking leave the money in ubank earning greater than the loan interest rate)? yes some, don't know how many, will. i imagine it has to be a term deposit with the lenders bank. Tom you're not going to beat them at their own game!

[cobran20]

zaph, on 15 August 2011 - 04:03 AM, said:

huh? they'd take a deposit as a deposit.

oh i think what you're saying is would they take a term deposit as collateral on a loan (eg you're thinking leave the money in ubank earning greater than the loan interest rate)? yes some, don't know how many, will. i imagine it has to be a term deposit with the lenders bank. Tom you're not going to beat them at their own game!

Term deposits pay interest using the simple interest formula vs savings/loans where interest is calculated using compound interest. So if a bank's interest on TD's is similar to that of its loans, the bank is still making money purely as a result of the interest calculation formula being used.

[zaph]

cobran20, on 15 August 2011 - 04:17 AM, said:

Term deposits pay interest using the simple interest formula vs savings/loans where interest is calculated using compound interest. So if a bank's interest on TD's is similar to that of its loans, the bank is still making money purely as a result of the interest calculation formula being used.

like i said you can't beat a bank at it's own game.

although i'm not sure you are correct here (but really unsure). a term deposit interest is paid on the term (as there should be no change). where as loans/on call funds are calculated daily and paid/repaid periodically.

[tom]

I have noticed that before about some term deposits. A standard deposit does get the interest calculated often enough (any more often than once a month makes very little difference to the outcome anyway) on a million dollars at 6.51% over 1 year calculated daily v monthly yields just under $200.00 extra over a year. daily is a sales gimmick, monthly is the real deal;

calculated daily v calculated annually yields an extra $2159.00 on the million at 6.51%.

there is no way I would take the risk on interest rates by just taking the fixed loan at 6.44% and putting it in U bank at 6.51%. Knowing my luck next month the RBA will drop rates by 1%...

Hey at least I could negatively gear it! It is for the purpose of making assesable income so would negative gearing be valid?

[cobran20]

zaph, on 15 August 2011 - 04:24 AM, said:

like i said you can't beat a bank at it's own game.

although i'm not sure you are correct here (but really unsure). a term deposit interest is paid on the term (as there should be no change). where as loans/on call funds are calculated daily and paid/repaid periodically.

Whilst I haven't checked all banks, all the one's I've used, calculated interest on TD's using simple interest.

[cobran20]

Deposit rates fall as market tips rate cut

Quote

Banks have slashed term deposit rates amid a flood of money flowing in from wary consumers and speculation that official interest rates could fall.

Since the start of last week, 29 banks have cut their term deposit rates, according to rate comparison site Mozo.com.au, bringing the average two-year deposit rate down 40 basis points to 5.69 per cent. Three-year deposits have dropped an average of 47 basis points to 5.77 per cent on average in the same period.

[Solomon]

Quote

"When lending is as subdued as it is right now, banks have a challenge with record deposits costing them interest payments, and fewer new loans generating interest income," Mr Smith said.

Read more: http://www.smh.com.a...l#ixzz1VLxDVTTd

This will be a part of the reason as well.
Decreasing margins.
It may be speculation of an RBA cut, but I think it would be more likely to be prudent margin protection.
If on top of this we have an increase in defaults in mortgage payments, then banks may have to borrow to pay their interest bill to depositors.
Got to be hitting their balance sheet.
This will get worse before it gets better.

[cobran20]

Hopefully we can discount a rate cut next month!

SMH: RBA's Stevens upbeat on economy

Quote

Reserve Bank chief Glenn Stevens says Australia is well positioned to tackle any further weakening of international conditions, prompting a rise in the dollar as markets priced out the risk of deep interest rate cuts.

Mr Stevens, regarded as one of the world's most hawkish central bankers, also told a parliamentary committee that Australia's terms of trade remained record highs and that the unemployment rate continued to be low.

"Our banks are strong, our currency is sound and our sovereign credit position is in the international top tier," he said. ‘‘Inflation bears careful watching, but we can keep it under control.’’

Advertisement: Story continues below He said Australian banks are strong, the Australian dollar is sound and the nation’s sovereign credit position is in the international top tier.

[Solomon]

Quote

"Our banks are strong, our currency is sound and our sovereign credit position is in the international top tier," he said. ‘‘Inflation bears careful watching, but we can keep it under control.’’

Amazing how 3 years ago, that all changed in a heartbeat.
Going up!
Going down

I hope they're not one day regarded as famous last words.

[cobran20]

Solomon, on 26 August 2011 - 01:30 AM, said:

I hope they're not one day regarded as famous last words.

my thoughts were the same.

[cobran20]

unchanged!

[staringclown]

cobran20, on 06 September 2011 - 05:37 AM, said:

unchanged!

No surprise if Combet's figure of 450 billion worth of resource projects in the pipeline is correct. The RBA have shown they are willing to cut but there is usually a significant lag time involved. That's the trouble with uncertainty. If a direct impact from European woes becomes obvious then they will cut and maybe cut hard. It hasn't happened yet though. That TD securities report that claimed a decrease in inflation may be an early indication they may cut as early as next month. But who knows?

[cobran20]

RBNZ throws cold water on RBA

Quote

…stock prices of Australian banks have fallen recently and CDS spreads have become elevated (figure 3.6), suggesting that, unless conditions improve, the risk premium on term funding will rise. There is not a one-for-one relationship between the CDS spreads and wholesale term funding costs, but there is a high correlation between the two measures. CDS spreads on Australian banks could have risen for a number of reasons, including concerns around global banking risks, the use of the CDS market as a hedge against Asia-Pacific risks, or Australian banks’ reliance on foreign funding markets. How sustained these pressures will be remains uncertain. If conditions do not improve, these pressures will see monetary conditions tighten, and banks would be likely to increase lending and deposit rates relative to the OCR.

[Solomon]

cobran20, on 15 September 2011 - 10:55 PM, said:

RBNZ throws cold water on RBA

Cobran,
Thanks for the post.
I always appreciate a second opinion.
Should we ever trust the dingo's reassurances, about the security of the chook-house.

[cobran20]

Solomon, on 16 September 2011 - 12:02 AM, said:

Should we ever trust the dingo's reassurances, about the security of the chook-house.

I'm not overly happy about bank deposits not being fully insured/backed by the RBA.
GFC Mk 2 could stress our banking system to breaking point.

[cobran20]

Interest rates is currently a hot topic of discussion at Macrobusiness

More on bank funding vulnerability
Rate cuts are coming