Australian home borrowers are expected to face years of higher interest rates as government debt costs surge in the coming decade.
The ominous sign about Australia’s inflation fight is contained in the debt market where investors lend money to the government for a set return.
When governments borrow money, they issue bonds also known as Australian Government Securities.
Investors who buy government bonds are offered fixed, annual interest payments until the set maturity date when they get their money back, which could be two, three, five or 10 years away.
These annual interest payments are known as bond yields.
To attract new, longer-term investors, the federal government now has to offer bond yields that are higher than the Reserve Bank of Australia cash rate.
That would make government debt a more attractive option for an investor than leaving money in a term deposit bank account earning interest.
JPMorgan Australia chief economist Ben Jarman is expecting another Reserve Bank rate hike in November, that would take the cash rate to a 12-year high of 4.35 per cent, with inflation still too high at 5.2 per cent.
Australian home borrowers are expected to face years of higher interest rates as government debt costs surge in the coming decade (pictured is a stock image)
‘The money market curve suggests that rates will stay high for some time,’ Mr Jarman told Daily Mail Australia.
‘Our forecast has been that we won’t get rate cuts to the end of 2024.’
The bad news prediction was delivered as new data from the Reserve Bank’s financial stability review for October showed mortgage stress levels surging, with 20 per cent of owner occupier borrowers, with a variable rate, spending at least one-third of their income on mortgage repayments.
That marked a big jump from just four per cent in April 2022 when the cash rate was still at a record-low of 0.1 per cent.
‘This share is the highest among low-income mortgagors,’ the RBA report said.
The RBA cash rate was kept on hold this month at an 11-year high of 4.1 per cent.
But 10-year Australian government bonds are offering yields of 4.55 per cent, up from September’s 4.21 per cent level.
American Treasury bonds with a 10-year maturity have an even higher 4.88 per cent yield.
Westpac senior currency strategist Sean Callow said this meant the Australian government had to offer higher yields to attract investors, who would get more back with an American Treasury bond.
‘The bottom line is if you’re buying a one-year, two-year Treasury or a 10-year, you’re going to get a higher interest rate in the US,’ he told Daily Mail Australia.
Australian bond yields have been climbing since June, when the RBA last raised rates.
Back then, these yields were at 3.92 – a level below the RBA cash rate.
But they have been steadily rising, edging up to 4.03 per cent in July and 4.13 per cent in August – the first month longer-dated yields rose above the Reserve Bank cash rate.
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By comparison, three-year bond yields were last month at 3.9 per cent, which was still below the RBA cash rate and the 10-year bond yield of 4.21 per cent.
A bigger gap between shorter and longer-dated government bond yields is often a sign that RBA interest rates are expected to stay high for several years.
Mr Jarman said the Reserve Bank’s more gradual approach to rate hikes, compared with the US, means there would be less scope to cut rates aggressively later, as it aimed to get inflation back into the two to three per cent target without causing an unnecessary unemployment surge.
‘From the RBA’s perspective, they have been trying to balance how fast they get to the target versus how the labour market performs,’ he said.
‘So if they’re taking a kind of delicate path, then it makes sense that there’s less scope for cuts as well.’
A weaker Australian dollar, now at 63 US cents, has made Australian government bonds more attractive to Japanese pension funds, in particular, during the past five months.
‘When you look at the bigger buyers of Australian bonds, like Japan, we’ve being seeing inflows from there, last few months,’ Mr Jarman said.
‘It does seem like the falling exchange rate is kind of helping.’
The Parliamentary Budget Office, which provides costings for members of Parliament, in June forecast government gross interest payments would surge as bond yields rose.
These interest payments were predicted to increase from 0.8 per cent of gross domestic product in 2023-24 to 1.2 per cent of GDP in 2033-34.
The Australian economy was worth $2.228trillion in 2023-24, national accounts data showed.
On that measure alone, government interest payments would climb from $17.822billion in 2023-24 to $26.732billion a decade later.
The Parliamentary Budget Office, which provides costings for members of Parliament, in June forecast government gross interest payments would surge as bond yields rose (pictured is Prime Minister Anthony Albanese)
But this $8.9billion surge is based on today’s economy.
The debt bill increase would be significantly larger as the economy grew, adding billions more to government interest payments.
Nonetheless, Mr Jarman said higher economic growth meant future governments could have revenue to service the interest bill.
‘If you’re running a nominal growth rate that’s above your interest payment rate, then you can afford to run deficits indefinitely, if not too big,’ he said.
The Australian Office of Financial Management, an arm of Treasury, issues government bonds.
The higher the yield, the lower the futures contract price in the secondary market for government bonds where investors buy and sell government debt obligations, also known as a fixed-income investment.
Bonds from a first-world nation like Australia are regarded as a safe-haven investment because the returns are guaranteed, unlike risk assets like shares which offer higher capital gains but they can wildly fluctuate.
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Read more at DailyMail.co.uk