Australian Investment Blog

Where do we believe local interest rates bottom out? On a very quiet morning when both the US and UK have enjoyed long weekends, we thought we would revisit the potential path for Australian interest rates. Investors typically have short term memories and forget markets are cyclical. Iron ore should be a great reminder - from $US15/t to $US190/t and back under $US40/t, all in 12 years! Official Australian interest rates are today at the all-time lowest level of 1.75%, with markets factoring in a 100% expectation of another cut in 2016. A very quick glance at the chart below shows that local interest rates were over 17% around 25 years ago. It's a very dangerous assumption to make that rates in Australia cannot get back to at least 5%, in the next 5-10 years. The RBA Official Cash Rate Monthly Chart When we look at the 3-year bond chart, going back to 1990, the pattern is concerning on a medium term time frame. Prices are rising (hence yields are falling) in a classic rising wedge structure, which is ultimately a topping style pattern. In other words 3-year bonds are likely to grind a little higher, potentially again testing the overhead resistance red line, BUT they are likely to eventually break hard and aggressively back towards the 94.00 area.
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