Long term swap rates have now moved 20 basis points higher since the end of October. These higher yields have been driven by the unwinding of RBA rate cut expectations (refer chart below) and the growing expectation that the US will raise rates in December. Over the medium term, rising US interest rates will provide the impetus for longer-term yields to keep rising, but there is still some uncertainty over when this may eventuate.
Implied cash rate pricing from bank bill futures market
Hedging flows (ie. locking in a fixed rate) have been light to date so the question remains will there be a late rush for the door as borrowers look to hedge their interest rate risk in a rising environment? Globally everyone has got comfortable with these low interest rates for so long that reactions to change could be delayed, or moves when they happen, exaggerated. Don’t miss the boat!
While nobody can predict how deeply investors will react to the terrorist attacks that killed 129 people in France last Friday night, history shows that incidents such as this prompt “flight to quality” buying as investors flock to the safe haven assets of US bonds, gold and the US dollar. Global share market futures were down over the weekend, as was our market, which looks set to open over 1% lower and below the psychological 5,000 mark this week.