How Donald Trump will push your mortgage rates higher
Analysis
By business editor Ian Verrender
Updated
http://www.abc.net.au/news/2017-03-13/how-donald-trump-will-push-your-mortgage-rates-higher/8347736
Your mortgage rates are about to rise. And you can thank President Donald Trump for that.
When America's central bank convenes mid-week, it is almost a foregone conclusion it will push interest rates higher.
With her trademark Joisey drawl, Janet Yellen — the world's most powerful woman — will explain that because America's economy is now in recovery, with employment nearing capacity and inflation expected to rise, the days of emergency rates are over.
She has been hinting at a rise for weeks now. And after Friday night, when US employment figures delivered another strong result, it is pretty much a certainty.
It will likely inflame an ongoing battle with the POTUS — that's President of the United States for the uninitiated — who is desperately attempting to resurrect American industry and who needs lower rates and a weaker dollar to do that.
It is a fight Mr Trump has no chance of winning.
Right now, Ms Yellen holds all the cards and the rest of the world, particularly Australian borrowers, will feel the effects.
While this rate rise has been a longtime coming, the speed with which the next few are bearing down on America is almost entirely down to him.
Why? Because The Donald's big spending plans — on defence, on a Mexican wall and anything else that takes his fancy — will spark inflation.
Add to that, plans for a massive tax cut and you are throwing fuel on a fiscal fire.
It is not just this week's rise that will hit Australia. US bond markets are pricing in another two rises this year.
That means global interest rates will hike and, with Australia's banking system one of the world's more active players in raising offshore funds, our banks will need to pay more for the cash they raise.
Don't be surprised if banks raise rates within months
Our banks are masters at passing on higher costs — which is what makes them among the world's most profitable financial institutions — so don't be stunned when they start raising rates independently of the Reserve Bank of Australia within the next few months.
You may have read some muddle-headed analysis recently that US bond markets were predicting the imminent demise of Mr Trump, based on the incorrect observation that bond yields were falling.
Nothing could be further from the truth. For a start, just last week, US bond yields hit their highest level in a decade.
What they are pricing is a US economic recovery — a trend that has been underway since long before The Apprentice President ascended the steps of the White House.
Wall Street unsure where to place its bets
A bit of background here. For the past five years, Wall Street has been at war with itself.
Until the US election, bond traders were convinced of a global recession while stock traders were betting it was blue skies and boom times ahead.
As your diarist noted last August, "something's gotta give". And it did, right after Mr Trump won the presidency.
Bonds can be tricky beasts to understand primarily because there is an inverse relationship between the price and the yield, or the interest rate.
Video: Federal Reserve board member says US is ready for a rate rise (The Business)
Like all governments, the US raises debt by selling bonds — a promise to return your money at a fixed interest rate over a certain amount of time.
That could be for two years, 10 years or even longer. Where it gets confusing is that hardly anyone buys the bonds and just holds on to them.
Rather than simply pick up the interest at the end of the term, many of the investors who buy these bonds, trade them. They buy and sell them on an open market.
It works a little like this. Given no-one ever thought interest rates could fall below zero, the maximum price for a bond was 100 units.
If the price dropped to 95, then the interest or yield was 5 per cent. If the price was at 98, the yield would be 2 per cent and so on.
The bond markets try to anticipate what the central bank — the US Federal Reserve — will do.
So, when things look desperate, investors flock to US government bonds because, as the world's biggest economy and with the greenback acting as the global reserve currency, US bonds are considered the safest port in an economic storm.
That pushes bond prices higher and yields, or interest rates, lower.
Bond traders lose big post US election
The opposite now is happening. Immediately after the US election, bond prices crashed and yields, or market interest rates, soared on Mr Trump's big spending plans.
Unlike the stock market, where daily moves are reported far and wide, there has been little mainstream coverage of this.
Suffering from Fed rate hike anxiety?
No-one knows exactly how much, but global bond traders caught out by the sharp sell-off late last year are thought to have lost well north of a trillion dollars.
They should have seen it coming. Fed officials have been blabbing on for almost two years that interest rates needed to rise as they tried to gently massage rates up.
It made the first move in December 2015 — the first rise in a decade — and another just before last Christmas.
On Wednesday night our time, it is almost certain to push official rates higher again, to between 0.75 per cent and 1.0 per cent.
Why does any of this matter to us? The short answer is that we've binged on foreign debt in recent years.
And while all the hand-wringing from Canberra is about our government debt, the real problem is with you and me.
Australia's debt-fuelled hangover set to get worse
Our national debt rose above $1 trillion for the first time about a year ago.
A quarter of that is government debt. The rest, the vast bulk, is private debt. And most of that has been raised by
our banks to fuel the greatest residential housing boom in our history.
A rise in American interest rates makes it more expensive for them to raise that cash. That means they will attempt to pass off those higher costs on to us as they go to refinance existing debt or raise new cash.
This could put Reserve Bank Governor Phil Lowe and the RBA in a pickle. The last thing he needs is for the banks to start raising rates.
We are hocked to the eyeballs with huge mortgages over some of the world's most expensive real estate and with wages growing at the slowest since the 1992 recession, a rate rise would crimp spending and hurt the economy.
The housing boom, and the construction boom it spawned, was a deliberate ploy by the Reserve Bank to soften the blow of the mining construction bust.
It worked. The party raged on. But it's left us with an even bigger debt-fuelled hangover, one that could create some real pain if global rates take off.