Australian Bond Exchange Weekly Newsletter
23 September 2022
The Federal Reserve delivered its third straight interest rate increase of 0.75 percent, taking the policy rate to 3-3.25 percent. More increases are expected as the world’s largest economy battles soaring prices, with the FOMC said it anticipated “ongoing increases…will be appropriate.”
Soaring prices have put pressure on the living costs for American families and businesses with the rate hikes leading to more expensive mortgages, loans and credit card debt, leaving analysts worried that a greater economy slowdown than policymakers expect can occur.
Federal Reserve chairman Jerome Powell has made it clear that officials will continue to act aggressively to cool the economy and avoid a repeat of the last time US inflation got out of control – 1970s and early 1980s. “We have got to get inflation behind us,” he said. “I wish there were a painless way to do that. There isn’t.”
Banks all around the world are facing their own inflation problems with the Bank of England raising its key interest rate to 2.25 percent from 1.75 percent on Thursday.
The Fed’s quarterly forecasts notes:
- US GDP growth to flatline this year, rising just 0.2 percent
- Annual growth to pick up to 1.2 percent in 2023
- Inflation to return to the banks 2% target in 2025
- Further rate hikes this year – totaling 1.25% percentage points – and more in 2023, with no cuts until 2024
- The jobless rate was forecast to rise to 4.4 percent next year and hold around that level through 2025
US Bond Market
Yields on two-year bonds are higher than yields on 10-year bonds, when in normal times they would be lower – known as an “inverted yield curve.” This indicates that the market expects the longer-term to be safer than the shorter-term and implies the short-term will include a recession – Jason Murphy, Forbes.
The RBA has lifted interest rates swiftly from 0.1% to 2.35% in a three-month span to cool economic growth. Further interest rate hikes are expected well in 2023.
The rate hikes work in multiple ways:
- Higher mortgage repayments, leaving less for discretionary spending
- Cost of borrowing is high – businesses less likely to borrow and spend
- Aussie dollar appreciates – imports cheaper and local goods more expensive
Bond Market in Australia
High levels of inflation and interest rates could see a slowdown of the Australian economy. Given the uncertainty, it is more important than ever to have a well-diversified portfolio that will weather interest rate movements.
Bonds, along with shares have had a tough run in 2022. However, bonds offer a degree of protection in reducing losses compared to many stocks – consistent with history.
With currently higher yields, if you’re optimistic on inflation, bonds make sense in your portfolio.
Current Investment Opportunities
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