Normally it would be cause for concern: Australia’s key bond rate is on its way to falling under 4% after hitting another all time low this week in the wake of the US Federal Reserve’s shock decision to set a rate band of 0% to .25% for the foreseeable future for its key rate.
Falling rates are usually a sign of impending slowdown and problems; and there of course are ahead for the economy in 2009.
The yield on our 10 year bond hit record low of 4.04% yesterday; 0.21% under the cash rate set on December 2 by the Reserve Bank.
In addition the 10 year bond’s yield is now lower than rates for short term near cash securities: 30, 90 and 180 day bills.
That’s contrary to the current situation in the US where cash and short term government bond yields are from 1% down to almost zero: and the 10 year US bond is around 2.05 %. It will go under 2% before Christmas.
Both are signs that there is no money being lent in the US of any volume; banks and other lenders are keeping their funds in cash, fearful of going back into the loan market and worried about the possibility of default among their peers and customers.
The Fed is the only lender and in 2009, the fate of the country and the global economy are in the hands of one man and one organisation: the US Federal Reserve and its chairman, Ben Bernanke.
This editorial in the Financial Time sums up why we in Australia and everyone around the world will be looking to Ben Bernanke and the Fed next year to save us from depression.
"We are flying blind. The Federal Reserve’s announcement this week that it was abandoning conventional rate measures in favour of directly propping up lending represents a bold experiment in policy.
"Ben Bernanke, Fed chairman, is taking a gamble – but he had little choice. Aggressive easing, however, creates its own difficulties.
"The US real economy is crumbling and continues to deteriorate; the global downturn has been exacerbated by a crippled domestic financial system. Credit is not flowing to consumers and businesses because risk spreads are too high.
"This week, the Fed responded decisively. It cut rates to a band between zero and 0.25 per cent. Although nominally a deep cut from 1 per cent, market interest rates were already plumbing these depths.
"By just aiming to keep the short-term rate within a range rather than on a point target, the Fed gives itself the flexibility to focus on restoring lending.
"The Fed aims to drive down punitive borrowing costs by ensuring adequate support for loan demand in the secondary market.
In order to increase the flow of affordable lending, it currently plans to buy agency debt, mortgage-backed securities and consumer loans as the situation warrants.
"The Fed is focusing on unclogging credit lines, but there is another good reason to pursue this policy. This week, the volatile US headline inflation measure fell to 1.1 per cent on an annualised basis – and looks likely to turn negative.
"There is no problem with a spell of falling prices but if expectations of a sustained price decline become embedded, these little movements could turn into full-blown deflation.
"In a heavily indebted country such as the US, persistent deflation would be poisonous. Debts which are denominated in fixed prices would increase in value, pulling balance sheets apart.
"Insolvencies would rise, demand would fall, and prices would tumble yet further. Restoring credit may be the Fed’s primary aim, but its measures are also an insurance policy against falling into a deflationary spiral."
That about sums up the outlook for us here and the rest of the planet in 2009. It’s a real devil and deep doodah (to use an Americanism) situation.
We have to hope it works.
But contrary to the situation in the US, here in Australia money is being lent here and some tough decisions made, as we saw this week with two groups of banks rolling over the recapitalising struggling big debtors in PBL Media ($4.2 billion) and the Centro group (with just over $6 billion).
In both cases the loan terms were changed to help the stricken borrowers and new money advanced: not much, but certainly more than you’d have seen in any similar deal in the US recently
Macquarie Bank interest rate strategist, Rory Robertson says the yield on the 10 year bond is heading under 4% and had dropped 1.50% since mid October.
He said he believes the RBA will cut in February by 0.50% to 3.75% "but the possibilities range from nothing done to another 1% cut".
Certainly the Australian dollar is helping: it hit a 2 month high in overnight trading above 70.70 US cents as the US dollar continued to lose ground against the euro and the yen in particular.
It fell back 1.3 cents Thursday night to around 67.80 US cents, then recovered the 68 US cent mark. The US dollar continued to weaken, falling through $US1.42 to the euro.
Our dollar lost more than 1 US cent Thursday night, even as the US dollar fell. The pound is moving closer to parity with the euro as well.
The US dollar has now lost more than 9% in four trading days against the greenback and has hit new 13 year lows against the stronger yen.
The weak dollar is now starting to attract more and more attention with some offshore strategists seeing a rate of $US1.50 to the euro sooner rather than later.
That means the pressure will be off the Aussie and the RBA, which cut its support for the currency to just $134 million in November, compared with the $3.2 billion of support in the last 10 days of October when it seemed the world financial s
