With 0% interest rate in US, I am starting to think why can't Australia have the same? If its just about printing money, what makes the interest rate 0% in some country and 10% in some? Can someone explain in noob terms? Are we going to see below 2% interest rate for next 10 years here in Australia too?
Ha ha.no..I am just me. A noob who has been too busy building a career and not paying attention to economy / investing etc , I thought my only investment is my skill set which will pay for it all. And now quite pissed to realise that my 50hr / week hard work is paid with stuff that grows out of thin air aka paper money. I can't seem to make sense of it all now that I am taking an interest in it! While I earned 4x time from work than my friend , he made just as much just by sitting his lazy ass on the house he bought 2 years ago.. I was waiting for the interest rate to go back to 'NORMAL' but now I have a feeling that it might just sit at 0% , its all a delusion isn't it!
The debt of Australian banks has been caught up in the turbulence in credit markets as risk spreads move to their highest in two years.
The spike in bank spreads, which has accompanied growing fears about the impact of a slowing China and declining commodity prices, may pressure funding costs for the banks, under pressure to raise more long-term debt from the wholesale markets.
Last week, the cost of insuring against a default of a major Australian bank spiked above 100 basis points, the first time this key indicator of wholesale costs has traded in triple digits since September 2013.
Credit default swap spreads have now jumped by almost 55 per cent since late July, when contracts traded hands for under 60 basis points, and almost 30 per cent from mid-September. Advertisement
Australian banks, which source around $100 billion of funds annually from wholesale markets, have historically been vulnerable to changing conditions.
The current widening will have a "minor" impact on bank funding costs, according to Jonathan Rochford of credit fund Narrow Road Capital, relative to regulatory changes forced upon them by the Australian Prudential Regulation Authority.
"The bigger issue is APRA requirements for the banks to have more long term debt and equity, and the change in rules around what is a retail term deposit and what isn't," he said.
Australia's banks have already raised $16 billion of equity this year to strengthen their balance sheets, but more recently APRA has signalled some concern that the banks have not done enough to shift more funding from cheaper short term markets into long term debt, which could put upward pressure on costs, particularly as spreads widen.
The moves in Australian bank and corporate debt spreads reflect skittishness in global credit markets.
Both equity and credit traders have kept a close watch on two US high-yield bond Exchange traded funds – the iShares High Yield Corporate bond ETF and the SPDR High Yield Bond ETF – which have declined 4 per cent in a month and 8 per cent so far in 2015. Hybrids punished
Australian retail investors that have taken exposure to the banks via low-ranking hybrid securities have also been punished, although they've been spared some of the pain felt by equity investors.
While CBA shares have shed 20 per cent over six months, CBA's Perls VII hybrids have fallen by 9 per cent, although both securities are down around 11 per cent so far in 2015.
"Bank hybrids have been overbought for the last two years and the recent movements are reflective of fair value," said Mr Rochford. "I think they will follow the cycle with credit generally from here on, but there remains better value elsewhere."
While bank spreads have pushed wider, metals and mining companies have been particularly hard hit. Falling oil prices have increased default risks among highly indebted energy borrowers that account for a large share of the credit universe.
Meanwhile, a fall in the iron ore price has weighed on the majors, with BHP Billiton and Rio Tinto credit default swap spreads also having surged in recent weeks.
For BHP the spike spreads complicated its efforts to sell a multicurrency hybrid security aimed at shoring up the miner's strong A+ credit rating.
Already-skittish credit markets were on high alert in recent days. Last Monday, shares in commodities trading giant Glencore lost 30 per cent as analysts questioned its solvency should base metal prices slide further.
That led to a spike in the cost of insuring against Glencore debt to above 1000 basis points, a move reminiscent of the 2008 global financial crisis, as counterparties moved to hedge their credit risk.
The credit moves may have exaggerated the extent of lenders' concerns, but cannot be ignored.
"There are some commodity trading banks that will have exposure to Glencore but the market isn't at the point of calculating how much they might lose," said Mr Rochford. "The risk is that with credit rating where it is and spread where it is, it only takes a few rumours of collateral and margin calls for the situation to spiral."
The weaker conditions in credit markets have slowed corporate bond issuance, even as companies race to secure funds before a potential hike in US interest rates.
Some Australian firms have still braved hostile capital markets for long-term funding. Last week Westfield Corporation raised $US1 billion of five-year bonds, but the property giant was forced to price the debt above its marketing range and dropped plans to issue longer-term 10-year debt on account of the weaker conditions.
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
Ha ha.no..I am just me. A noob who has been too busy building a career and not paying attention to economy / investing etc , I thought my only investment is my skill set which will pay for it all. And now quite pissed to realise that my 50hr / week hard work is paid with stuff that grows out of thin air aka paper money. I can't seem to make sense of it all now that I am taking an interest in it! While I earned 4x time from work than my friend , he made just as much just by sitting his lazy ass on the house he bought 2 years ago.. I was waiting for the interest rate to go back to 'NORMAL' but now I have a feeling that it might just sit at 0% , its all a delusion isn't it!
Interest rates on bonds are ostensibly a function of 3 things
1.) The likelihood of the issuer defaulting 2.) The maturity date 3.) The outlook for inflation
The yield (interest) that bonds pay plays a very important part in financial markets, in particular government issued debt ('Treasuries' as they're known in the U.S), as this type of debt is considered to be 'risk free' i.e. the likelihood of default is virtually zero.
What central banks are doing with low interest rates and QE is to try and manipulate this 'risk free' rate, i.e. to make the risk-free rate of return so pathetic that it forces people to invest their money into more 'productive' wealth generating asset classes, like stocks and property. Unfortunately this has not had the effect that they were hoping for (i.e. creating productive enterprises and well paying jobs), it's merely distorted value of risk and pumped up asset prices (as you've noticed via the diminishing returns of your wages).
With reference to how low interest rates could go in this country, please read my thread here:
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
Interest rates on bonds are ostensibly a function of 3 things
1.) The likelihood of the issuer defaulting 2.) The maturity date 3.) The outlook for inflation
The yield (interest) that bonds pay plays a very important part in financial markets, in particular government issued debt ('Treasuries' as they're known in the U.S), as this type of debt is considered to be 'risk free' i.e. the likelihood of default is virtually zero.
What central banks are doing with low interest rates and QE is to try and manipulate this 'risk free' rate, i.e. to make the risk-free rate of return so pathetic that it forces people to invest their money into more 'productive' wealth generating asset classes, like stocks and property. Unfortunately this has not had the effect that they were hoping for (i.e. creating productive enterprises and well paying jobs), it's merely distorted value of risk and pumped up asset prices (as you've noticed via the diminishing returns of your wages).
With reference to how low interest rates could go in this country, please read my thread here:
Thanks, If I understand , inflation is what dictates interest rates. How come house price is not counted in inflation?
Because house prices aren't a consumption item. When you "consume" the utility of a house you pay rent, therefore rent is included in CPI inflation figures.
The assumption that's made is that in an ideal world rents (and therefore CPI inflation) will move in tandem with house prices. However the chronic distortions to interest rates by central banks previously mentioned, and speculative investmemt in housing mean this relationship is clearly not in force right now.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
Because house prices aren't a consumption item. When you "consume" the utility of a house you pay rent, therefore rent is included in CPI inflation figures.
The assumption that's made is that in an ideal world rents (and therefore CPI inflation) will move in tandem with house prices. However the chronic distortions to interest rates by central banks previously mentioned, and speculative investmemt in housing mean this relationship is clearly not in force right now.
Perhaps central banks should be keeping an eye on asset price inflation. May have made the last ten years easier.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
What central banks are doing with low interest rates and QE is to try and manipulate this 'risk free' rate, i.e. to make the risk-free rate of return so pathetic that it forces people to invest their money into more 'productive' wealth generating asset classes, like stocks and property. Unfortunately this has not had the effect that they were hoping for (i.e. creating productive enterprises and well paying jobs), it's merely distorted value of risk and pumped up asset prices (as you've noticed via the diminishing returns of your wages).
Are you sure the whole thing hasn't worked at all? In the US the unemployment rate fell from 11% down to 5% during the period when QE / ZIRP policy has been running since the GFC? The US went from a prolonged and deep recession into a period of fairly sustained and constant GDP growth in the 2-3%pa range since - over a period of 5+ years now?
PS - need to be careful to say whether you are talking about the US or Oz as well (ie your reference to "your" wages)? We don't have ZIRP and we don't/didn't have QE - we just have quite low interest rates at the moment.
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