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How low will interest rates go (and when will they get there)?

In his great blog Pete Wargent suggests interest rates may fall to around 2.50% in July 2013 and he cites the ASX futures yield curve.

That would be the equivalent of interest rates being cut four times in the next year.

What yield curves are

Yield curves are not a prediction of the future, rather they are a reflection of yields or interest rates across different contract periods for a similar debt contract.

Where the yield curve is inverted, this reflects that long term investors expect the economic outlook to slow or decline (meaning that interest rates will fall as central banks attempt to stimulate the economy), so they will accept lower interest returns today.

The nerdy stuff

Normally, a yield curve is shaped asymptotically – that is, it curves upwards (the longer the maturity term on the debt, the higher the yield is). The curve generally then flattens out the further to to the right (into the future) the graph progresses as yields top out.

The increased yield for longer term debt reflects that over a longer time period there is an increased possibility of a catastrophic event leading to default, and thus the investor (lender) demands a higher rate of return for the assumed risk.

The inverted yield curve occurs when long-term yields fall below short-term yields, which might reflect a period of fear in the market of interest rates dropping.

When the wealthy are fearful and risk-averse, and see the safest place for their funds as lending to government treasuries for the long-term, the increased demand for these products drives down long-term yields too.

Source: Peter Wargent’s blog

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'How low will interest rates go (and when will they get there)?' have 3 comments

  1. Avatar for Property Update

    September 12, 2012 @ 9:22 am Mike

    And can this be predicted or is this a guess?
    Earlier this year people were predicting/guessing interest rates were going to sky rocket through the roof, I guess there prediction was wrong and the rates lowered. How can they be right this time, they can’t, the RBA rates will not go to 2.5 or we would have seen a lot lower than it was in 2008 2009 etc.
    Now is the best time to be buying and if your on a floating interest rate then you will take advantage if there is any drops, if your on a fixed rate and it drops so be it, if it rises so be it you win, when you buy a property rates are always going to go up and down throughout the time you own it, but there will always be an average. So if you want to buy a property don’t be waiting on the one person above guessing that interest rates will drop because even if they do they will rise again and remember it always averages out and timing couldn’t be better to buy a property in today’s market.

    Reply

  2. Avatar for Property Update

    September 12, 2012 @ 10:19 am Pete Wargent

    Hi Mike, the immediate term certainly can’t be predicted – in fact, take a look at my blog today on what property experts predicted for 2012! All wrong.

    As I mention, a yield curve isn’t a prediction and nor does it even reflect the most likely outcome – only the market’s weighted average of possible outcomes (i.e. the most likely outcome over 12 months is probably the cash rate falling a little lower than where it is today, but there is an outside chance of a severe drop to near-zero levels).

    I agree with your fixed vs. variable point – history seems to show that most often in Australia when fixed rates drop to these kinds of levels, they’ve tended to bounce fairly quickly, but it’s your long term goal that’s important. The direction of rates will impact market confidence though, so interesting times ahead.

    Pete

    Reply

  3. Avatar for Property Update

    August 6, 2013 @ 5:46 pm Pete Wargent

    So we hit 2.50% today.

    The implied yield curve proved to be pretty accurate after all.

    Reply


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