Blog 3 | 24th February 2015
Who is paying the additional interest on the debt?
Much has changed in the world since the Financial Crisis of September 2008. Structural changes to financial markets have been a necessary evolution from this broadly unforeseen event. One of the major structural changes here in Australia has been the issuance of Commonwealth Government Securities (CGS) that has grown over 6 fold since September 2008; Australian Financial Intermediaries (AFIs) being are the largest domestic buyers of these instruments. The main reason for this is to ensure that in the event of a future financial crisis here in Australia the RBA would be able to inject liquidity into to AFIs quickly by printing currency and buying these holdings of bonds from the AFIs in a process known as Quantitative Easing (QE). This precautionary measure places the Australian banking system in much better position to weather a financial storm, but does come at a price. Chart 3.1 shows the change in the holdings of CGS and local and semi-government and other public authority securities by AFIs since January 2000.
The Australian Office of Financial Management (AOFM) is the body responsible for managing the market for issuing CGS. They regularly update the value of CGS on issue on their website www.aofm.gov.au. Graph 3.2 shows the growth in CGS on issue since January 2000.
As at January 2000 when the Cash Rate was 5% interest on CGS was an average of 6.88% pa (across the 2yr, 3yr, 5yr and 10yr terms), which on an account of AU$79.78 billion was AU$5.49 billion pa. As at September when the Cash Rate was 2.5% interest on CGS was an average of 3.01% pa (across the 2yr, 3yr, 5yr and 10yr terms), which on an account of AU$368.47 billion was AU$11.10 billion. Chart 3.3 shows the quarterly change in annual interest on CGS since March 2000.
The question is - who is paying the additional interest on the debt? And, who should be responsible to pay it?
Blog post 2 | 3rd February 2015
Cut or Not To Cut…
As we get closer to the release of the RBA’s interest rate decision release today at 2.30pm AEDT, one of the key factors they will need to take into account is the Bank Accepted Bills (BAB) data which estimates end of day bank bill rates. See Chart 2.1 below:
Without an interest rate cut and an increase in the supply of liquidity, the cost of funding between the banks in the short-term will undoubtedly rise.
Blog post 1 | 6th January 2015
Interest Rates in 2015
Happy New Year everyone!
We thought it would be a great idea to kick off 2015 with a blog to help provide more information around what is happening in the Australian economy. 2014 was an economically challenging year on many fronts; the Federal Government’s efforts to balance the budget have put negative pressure on national spending, the consistent downward trend of commodity prices since February-March 2014 has downsized the flow of funds from the mining boom, unemployment has steadily crept up to 6.3%, and business and consumer confidence are both declined to lows in the final reports of the year.
It is for this reason that many senior banking economists have revised their outlook for future changes to Cash Rate by Reserve Bank of Australia (RBA). NAB, Westpac and Deutsche Bank all foresee a 0.5 percentage point cut for 2015, with a 0.25 percentage point cut in first few months of the year. This prediction is in line with the trending market yields on Commonwealth Government Securities (CGS), which are bonds issued by the Federal Government. Chart 1.1 shows this relationship in a graph.
The market for CGS is seen to historically lead the Cash Rate, as these yields are a reflection of the market price for the future value of money. The Cash Rate is the interest rate that the RBA sets in the market for overnight funds between the banks. When the RBA reduces the Cash Rate they increase the supply of cash (currency), which in turn dilute the value of money into the future.
Chart 1.2 shows a close up of the resent downward trend of CGS.
Note the trend of 2 year and 3 year CGS circled in red; 3 year CGS have in recent weeks trended lower than 2 year CGS. What this indicates is that investors (albeit fund managers who represent their investors) expect interest rates to be lower for longer so they see more value in holding 3 year bonds over 2 year bonds. In other words, investors are not confident that the Australian economy will improve enough to warrant the RBA to raise the Cash Rate any time soon.
Ultimately, if the market for CGS continues to decline it is likely that we will see interest rate cuts into 2015.
Australian Debt Clock.com.au
Australian Debt Clock is dedicated to informing the public of our nations trending debt levels. These debt levels are given in isolation of a vast amount of economic data and information that this website does not explore, and therefore should not be used as a sole point of reference.
Australian Debt Clock seeks to create awareness around an economic issue that has many dimensions. This website only explores the aggregating levels of debt amongst the different sectors of the Australian economy, and seeks to remain unbiased of the positive and negative economic implications. Rather, this website will pursue presenting impartial information that will serve as a point of reference for users.
It is the intent of this website to encourage conscious and open-minded thinking in relation to Australia’s economic situation. Financial literacy and awareness of our nations trending debt levels is an important part of reaching a well-rounded economic understanding.
Please share this information with family, friends and colleagues to ensure they are educated and up-to-date with the numbers behind our current economic times.