25: Interest Rates. Can you predict them in 150 Seconds
Interest Rates. A 150 second 'cheat note' great for dinner party conversation, impressing your boss...or impressing your employees.
TRANSCRIPT
Interest Rates. Can You Predict Them In 150 Seconds
Many in Australia’s financial markets believe future interest rates can be predicted by the $1 trillion Australian government bond market. Mention bonds and everyone falls asleep.
Boring government bonds, have yields. The bonds yield is its current percentage return, just like a savings account has a percentage return. Bond percentage yields change daily providing a prediction as to the future direction of interest rates.
Type into a Google search, “government 3 yr bond yield” That big percentage number appearing on your screen is the bond markets, current prediction of the Reserve Banks cash rate, for this very day, in 3 years time. It’s that easy.
3 years ago, in July 2019, bond yields were .92%. So 3 years ago, if I used the bond yield as a forecasting tool, I’d be very happy as the cash rate it was predicting, turned out to be .85% The RBA have now increased the cash rate to 1.35%. So even now that prediction, 3 years ago, is only .43% out. Not bad when you consider nobody predicted COVID.
Now, there’s a lot of people who don’t like to think, that a band of mysterious bond traders can influence Australia’s economy with their trading activities. But if you're buying and selling $1 trillion worth of government bonds, purely for profit, your success record is on public display, month by month, year in year, year out and, only a Google search away. I’ve put a link in the notes to this podcast, on the Burgernomics web site, showing the last 9 years of government monthly bond yields. You can see how accurate past bond yields were and what they are projecting in the future.
Are the bond markets 100% accurate, 100% of the time. No. But if I’m happy with a margin of error of less than 1%, bond yields are mostly accurate.
For a more detailed discussion on bond yields and where interest rates are headed. join one of Australia’s most experienced Chief Economist’s,
Alan Oster from the NAB, with me, Ross MacDowell on the Burgernomics Podcast
