But the RBA is sanguine: “There had also been some flow-through to short-term interest rates in a few other markets, though to a lesser extent. Futures pricing suggested that these pressures in US money markets were expected to abate somewhat over the coming months.”
Even if it is short term, the rise in short term spread was unexpected. Given the global economic outlook – and granted there’s a lot of moving parts – it should be short term interest rates would remain lower while longer term rates would gradually rise.
That reflects expectations central banks around the world – with the notable exception of the US Federal Reserve – have pretty much said they won’t be raising rates in the immediate future. That’s the short end.
However, with economic growth expectations still robust on the whole, interest rates – official and market rates – in the future reflected in longer term debt today – would be expected to be higher. Rates tend to be higher with healthy growth and rising inflation.
Yet that isn’t happening. Short term funding costs have spiked. Longer term rates meanwhile don’t seem to be pricing in the economic growth seen elsewhere.
As Reserve Bank of Australia governor Philip Lowe said after the latest monetary policy decision to keep rates on hold: “Long-term bond yields have risen over the past six months, but are still low”.
As the latest RBA monetary policy minutes reflect, there are several potentially contributing factors, including rising US rates alongside a deteriorating US fiscal outlook (which requires the issue of more debt), but nothing specifically explains what is happening.
The changes in the US tax regime, which is leading to companies shifting money back to the US, is another possible cause.
This spike in short term funding costs may be just temporary, a new year market anomaly.
This year short term spreads, as measured by the ratio of the bank bill swap rate (BBSW) to the market’s pricing of official interest rates (OIS), have reached nearly 60 basis points compared with a more recent average of around 25.
That’s the most precipitous spike for a decade.
It’s meaningful even though regulatory forces since the financial crisis have shifted banks towards greater reliance on less volatile consumer deposits and longer term debt.