Bad news for Australian home owners as mortgage lenders fail to pass on Reserve Bank interest-rate cuts in full is good news for bond investors, as pressure mounts for even lower benchmark borrowing costs.
Home owners are paying the most for loans relative to the RBA’s cash rate since November 1994, with a 3.37 percentage point gap between the 3.25 percent benchmark and the average cost of a standard mortgage from Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd., Commonwealth Bank of Australia and Westpac Banking Corp., Bloomberg-compiled data show. U.S. 30-year mortgages cost 3.49 percent, near the least relative to Federal Reserve’s near-zero benchmark since 2008.
Concern that RBA policy actions are being blunted as the central bank seeks to insulate the nation from a fading mining boom is spurring traders to bet on a 2.5 percent cash rate by May, the swap market indicates. That’s pushing yields across the nation’s bond market to historic lows, with the rate on Bank of America Merrill Lynch’s Broad Market index of sovereign, government-backed and corporate debt dropping to 3.21 percent on Oct. 3, the least since the gauge began in 1996.
“The central bank has had to reduce official rates by more than historically to impact the end borrowing rates to the same degree,” said Anne Anderson, head of Asia-Pacific fixed income for UBS Global Asset Management. “This has also supported the drive lower in bond yields.”
Australia’s record-low benchmark was the 2.89 percent reached in January 1960, RBA figures show. The central bank has cut by 1.5 percentage points since November.
“On monetary policy, we have ammunition,” Governor Glenn Stevens said at an Oct. 12 seminar in Tokyo. “Unusually for an advanced country, we actually have materially positive interest rates, so if needed we have scope to move there as long as inflation is OK, which at present it seems to be.”
Mortgage arrears in the nation haven’t declined as much as expected this year because of the banks keeping part of the RBA’s cuts, Moody’s Investors Service said in a statement yesterday. Across the nation, 1.8 percent of people are 30 days or more behind on their loan payments, according to the report.
National Australia Bank, Commonwealth Bank and ANZ Bank passed on 20 basis points of the RBA’s 25 basis point cut this month. Westpac cut by 18 basis points.
Standard variable home-loan rates from the four banks cost an average 6.62 percent, according to statements from the lenders. That compares with 5.85 percent when the RBA’s key rate was at 3.25 percent in February 2009, central bank data show.
The annual growth of outstanding home loans has fallen to 4.8 percent as of August, the slowest pace since at least 1977, from 14 percent in 2006, the RBA data show.
Australian banks have sought to finance a larger share of lending from deposits since the global credit freeze, paying higher rates for the more stable funding. Deposits make up 53 percent of liabilities from about 40 percent in 2008, with lenders raising less money from bond markets as a consequence, according to central bank figures.
“The strong competition for deposits has widened their spreads relative to benchmark rates,” the RBA said in its financial stability review published last month.
Term deposits swelled 13 percent to A$544.3 billion in the year to August, the most in RBA data going back to 1984.
The extra yield investors demand to hold Australian dollar-denominated financial bonds instead of government debt has dropped 127 basis points this year to 181 yesterday, the least since August 2011, Merrill Lynch index data show. It remains 120 basis points higher than at the end of 2006.
“The appetite for Australian financial bonds has definitely improved and spreads have narrowed,” said Jarrod Kerr, director of Australia and New Zealand rates strategy at Credit Suisse Group AG in Singapore. “That said, banks are still paying a wider difference between term deposits and the cash rate, which is being reflected in a wider spread to lending rates.”
Stevens will probably cut interest rates again before year-end, according to economists surveyed by Bloomberg.
The RBA will lower the overnight cash rate target to 3 percent or lower by Dec. 31, according to 29 of 34 economists polled this month, unwinding all of the 1.75 percentage points of increases Stevens made as Australia recovered from the global financial crisis that started in 2008. Five economists expect no change.
“To the extent that cash rate cuts have not been fully passed through to bank lending rates, due to higher funding costs, the RBA has adjusted its setting further with the aim of achieving the desired level of lending rates,” said Paul Bloxham, chief economist for Australia and New Zealand at HSBC Holdings Plc, in an Oct. 16 note to clients. “We see the current RBA cash rate setting as around 75 basis points below its neutral level.”
Pacific Investment Management Co., manager of the world’s biggest bond fund, has boosted holdings in Australia and New Zealand as it expects policy makers to cut interest rates further.
“Rates will continue to fall in this region, in Australia and New Zealand,” said Scott Mather, head of global portfolio management at Newport Beach, California-based Pimco, in a conference call from Auckland today. “It’s partially the reflection of weak global growth and partially in response to an abnormal amount of currency strength relative to what history would tell you we should have.”
Ten-year yields declined 3 basis points to 3.20 percent at 1:04 p.m. in Sydney, bringing the drop this past year to 124 basis points. That’s still the biggest drop among 24 developed markets tracked by Bloomberg outside of Ireland, Portugal and Greece -- who have all accepted international bailouts -- and Belgium.
The interest rate on the benchmark bonds reached a record-low 2.698 percent in June. Yields on state government securities fell to 3.312 percent on Oct. 3 and the rate for financial bonds dropped to 4.367 percent on Oct. 16, both historic lows, according to Merrill Lynch indexes.
Investor appetite for Australia’s bonds has also helped drive the local dollar’s 47 percent climb over the past four years, the biggest surge among more than 150 currencies tracked by Bloomberg. The so-called Aussie bought $1.0371 as of 1:20 p.m. in Sydney.
The Markit iTraxx Australia index of corporate bond risk increased 1.5 basis points to 133.5 as of 11:43 a.m. in Sydney, according to Credit Agricole. The average cost of contracts on the four biggest banks fell to 121 basis points on Oct. 18, the lowest since July 4, 2011, CMA data show.
The RBA has “maximum flexibility” to reduce the key rate if needed as the government returns Australia’s budget to surplus, Treasurer Wayne Swan said last week.
The Australian government is keeping its commitment to end four years of deficits even as BHP Billiton Ltd., the world’s largest mining company, delayed projects estimated at $68 billion by Deutsche Bank AG on sliding resources prices.
“The burden for adjustment to stimulate demand will fall to the RBA through interest rate cuts, especially in light of falling commodity prices and the government’s desire to return the budget to surplus,” said Adam Donaldson, Sydney-based head of debt research at Commonwealth Bank. “Bond yields, along the curve, will fall to new lows as traders bet on more interest-rate cuts.”