Short term rates in Australia rise 9 fold

I want to highlight the parabolas seen in short term rates, namely the Aussie and U.S. 2 years bond yields.

Beyond the shape, most striking is the quantum.

The cost of short-term money in Australia has risen 9 fold from 0.1% to 0.9% in only 4 months.

In the U.S., they have quintupled from 0.2% to 1% in 4 months.

I’ve never seen that before. This makes for a serious parabolic shape.

The nearest comparable was when Aussie 2’s rose (only doubling) from 5% to 10% in 1994 and from 2.5% to 5% in 2009.

And they took 10 months to do that.

Let’s forget the ‘quantum’ thing for a moment. I’ve not seen the Aussie 2’s trade at 80 basis points above their 50 week moving average for 2 decades.

(another chart for a different post)

Yes, I know, we are coming off a low base, but the quantum does matter if you are fully laden with debt or your mathematics become acute when servicing your interest payments, especially after they have just quadrupled or more.

It also can matter when Central Banks have kept rates at 0% – 0.25%.

This is a topic I have been presenting about over the past year. It’s summarised as ‘how the bond market may force the central banks to increase rates against their own policy wishes’.

Australian banks have been raising fixed interest home loan rates.

One thing to watch out for though, it that I think inflation is peaking at this juncture and we may have lower GDP prints in the next couple quarters. So I can also understand the Central Banks wait and see stance.

I have more work to do in deciphering the probability of a peak in these 2 year yields, because Overbought can stay Overbought for much longer than Oversold’s do…….but it’s only the 9th Weekly Overbought reading in the U.S. 2’s seen over the past 22 years.

For the Australian 2’s, this is only 6th time they are in Weekly Overbought territory in 27 years.

But I’ll remind readers of the sharp retracements that tend to follow a parabolic move.

The other work I’m doing to correlate the 2’s ascendancy and peaks with timing the entry into selected ‘growth’ names that I like in stocks.

January 26, 2022

by Rob Zdravevski

rob@karriasset.com.au