OPINION: After everything looked heinously expensive last year, some markets are looking cheap.
. Our central case was that US equities would fall by more than 30 per cent as the US 10-year government bond yield climbed from 1 per cent to north of 3.2 per cent . The trigger for these moves would be the Fed’s need to lift its cash rate to between 2.5 per cent and 3 per cent, miles above the 1.3 per cent market forecast at the time. This would smash fixed-rate bonds and push global credit between 75 basis points and 125 basis points wider.
But we now face a very different world. The assets we sold last year suddenly look attractive again. As one example, the major banks’ five-year Tier 2 bonds paid a miserly 1.25 per cent spread above the quarterly bank bill swap rate last year. And BBSW was just 0.01 per cent. So, your total yield was only 1.26 per cent.This week, NAB issued a new five-year Tier 2 bond that offered a near-record 2.80 per cent spread above BBSW. And BBSW has surged to 2.2 per cent.
Listening to Federal Reserve chairman Jerome Powell speak after the bank’s decision to raise rates by another 75 basis points this week, one could detect a distinct shift. Powell said the Fed was now at its “neutral” 2.5 per cent cash rate. And although there were more increases to come, they would be more modest in size.
Inflation-adjusted wages growth is actually negative and disposable household incomes are getting destroyed by the RBA’s record interest rate increases. TheAdvertisement, the largest monthly loss in more than 32 years of data according to CoreLogic. Sydney dwelling values have declined by 5.2 per cent from their recent peak. Since the RBA first raised rates on May 4, home values in Sydney have shrunk at an incredible annual rate of 23 per cent.
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