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Swap rate points to stress release

Discussion in 'The Economy' started by Billv, 21st Oct, 2008.

  1. Billv

    Billv Getting there

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    FROZEN credit markets are showing tentative signs of a thaw in response to government rescue packages, easing bank funding costs from record highs.

    A key gauge of credit market stress - the difference between the overnight indexed swap rate and the cost of three-month interbank loans - fell from more than 90 basis points last week to 57 basis points yesterday.

    The chief interest rate strategist at Westpac, Damien McColough, said about three quarters of the fall was due to a change in official interest rate expectations but the shift showed the cost of funds had retreated from credit crisis peaks in recent weeks.

    "The fact that the bank bill swap rate fell today is a positive thing. It shows that there are investors out there that are prepared to lend to banks at lower rates than what they were prepared to lend at last Friday."

    Funding spreads overseas have also decreased but not as much as Australia's. London's interbank offering rate - an international borrowing gauge - last week fell for the first time since July.

    All big four banks bar Westpac have cut their mortgage rates since last week, and markets have begun to scale back their predictions of how deeply the Reserve Bank will cut the official interest rate next month.

    Last week markets were betting the central bank would cut official rates by up to one percentage point, but yesterday this had fallen to less than 75 basis points.

    more
    Swap rate points to stress release | smh.com.au
     
  2. AsxBroker

    AsxBroker Well-Known Member

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    By mid-afternoon the top 5 banks had announced that they have dropped rates independently of the RBA. Which means they finally have given the full 1% RBA cut from earlier this month.

    There is a flurry of activity around lending, though mainly to see what deals borrowers can do.

    Hopefully we won't have any more surprises and the RBA will pass on 0.50% on Melbourne Cup Day (As long as Glen Stevens is backing a good thing ;) )

    Cheers,

    Dan
     
  3. Billv

    Billv Getting there

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    I hope so, I am getting tired of listening to bad news and doom and gloom speculation to the point where I don't want to turn on the TV...:D

    Cheers
     
  4. islandgirl

    islandgirl Well-Known Member

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    Especially since the media has been provided such balanced and factual reporting and not at all indulging in scare mongering and sensationalism just to boost ratings -- NOT!!!!
     
  5. AsxBroker

    AsxBroker Well-Known Member

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    You generally don't see good news in newspapers (apart from interest rates dropping :) ).

    You probably won't see the following:

    BUY BANKS!!! HUGE YIELDS!!!

    SUN 11.4% (grossed up 16.28%)
    MQG 9.9% (grossed up 14.14%)
    NAB 7.6% (grossed up 10.86%)
    ANZ 7.2% (grossed up 10.28%)
    CBA 6.2% (grossed up 8.85%)
    WBC 5.9% (grossed up 8.43%)
    SGB 5.8% (grossed up 8.29%)
    BOQ 5.3% (grossed up 7.57%)

    On a more serious note, with the volatility, investors are going to wait until it settles down a bit, then eventually return to shares and property as yields on term deposits continue to shrink. At the moment we have inverse yield curves which aren't too good for investors who need the income.

    Cheers,

    Dan
     
    Last edited by a moderator: 22nd Oct, 2008
  6. Billv

    Billv Getting there

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    Dan

    Have the yields dropped in recent times?

    Cheers
     
  7. AsxBroker

    AsxBroker Well-Known Member

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    Hi BV,

    Which ones?

    Term deposits have dropped for the Top 5 Banks (ie, a few months ago term deposits were yielding 8.6% for 12 months, now 5% for 12 months). Though keep in mind that this is an inverse yield curve, which looks like the slash above the enter button "\", investors are rewarded more for a shorter time period than locking in for longer as RBA rates are expected to continue to drop, eg, 6.8% for 2 to 3 months compared to 5% for 12 months.

    A normal yield curve looks like the "/" slash, meaning that the longer you lock your funds up for, the more you are rewarded.

    When we reach a flat yield "curve" (ok, it's an oxymoron, how can a curve be flat???) looking like "-" will mean we have hit the bottom for interest rate cuts and then eventually return to a normal yield curve.

    For share yields they have gone up as the share price goes down (assuming that the dividend per share has stayed the same) saying that, if the yield looks too good be very very careful as you might get burnt...

    Cheers,

    Dan
     
  8. Billv

    Billv Getting there

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    Dan,

    I meant the share yields.

    I ask because If the share prices of the big 4 have been dropping in value I would have expected a higher return...

    Do you think they will reduce their divident?

    Cheers
     
  9. AsxBroker

    AsxBroker Well-Known Member

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    Hi BV,

    Right now is reporting season some skeletons are coming out of the closet...
    Dividend payouts might be reduced to clear out those skeletons. Though I would be surprised if the dividend payout reduces as much as the share price.

    Once we get through the reporting season things should settle down.

    Cheers,

    Dan
     
  10. bennymarsh

    bennymarsh Well-Known Member

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    Yields will drop as the prices of the banks go back up again with the market, but who knows when that will happen! They are all still making some very nice profits despite how difficult business has been for them, and with less competition in the banking sector that should only get better for them!