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I read with curiosity a personal finance article (in Australia) about fixing your home loan interest rate. Well, whether you fix it is going to depend on what part of the globe you live in.
We have seen an 0.5% cut in the US. Locally we still have the threat of further rises. Apart from that, pushing the Aussie dollar up and the US dollar down will bring about a decoupling in relative bond values.
But lets look at the US T Bonds and see is there a message there for us - yes all of us because even though there is chat about regional economies decoupling form the world’s number one economy the reality is that if the US sneezes other economies will still get the sniffles at least – even China.
click chart for more detail
We can see that Wave Four is not yet complete. Bonds could climb higher, meaning interest rates could go lower. But in the medium term – the next 3-4 years – bond prices could fall, meaning interest rates could head back up again. Why? Because inflation may not be under control.
I have chosen a weekly bond chart because a daily chart shows bonds falling (and rates rising, which is even more confusing). So even though the Fed may have cut the prime rate, interest rates are actually rising. The cost of cash is greater as the credit crunch reverberates.
So would you fix your loan if you owned a home in the US – or even had a business loan? If the US Fed makes further cuts then you may think hard about it. What about fixing in OZ? Despite the article I read, I think the ‘horse has bolted’.
There is one critical element missing in this analysis – the reality that it is going to be tougher to get loans at competitive rates as the banks scrutinize borrower credentials at every refinancing step.
Many borrowers will be happy to get a loan at a premium. For others, another interest rate rise – whether by a Reserve Bank or due to the rising cost of funds – will tip them over the edge.
Yes more foreclosures – in the US and here. Cash will be king for a while.
Enjoy the ride!
Tom Scollon
Chief Analyst
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