So bond rates are not ‘lower for longer’
For most of 2016, we have warned investors about the dangers of accepting historically low bond rates as the ‘new normal’. The reality is that US 10-year rates lower than at any time since George Washington was sworn in as the first President of the United States is anything but normal.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
karl
:
Hi Roger,
Do you think there’s much chance of the big four banks unilaterally increasing their variable rates on the back of increasing cost of funds? Clearly this is one signal that may snap property investors out of their frenzy.
Thanks,
Karl
Chris
:
Karl, I do.
Why ? Because the US will raise interest rates, if not in December, then soon after (Trump did not like Yellen’s stance on this) and the banks will pass this on because their “pool” of domestic funds is not big enough, hence they rely on sourcing funds from overseas to lend out here.
This is nothing new and was used as a reason by the banks approximately three years ago as to why Westpac couldn’t pass on the full rate cut. This means that any rate rises will also get passed onto us, especially given their margins are getting squeezed. The banks will do so out of step with the RBA.
Justin Smith
:
Hi Roger
Will higher bond rates be detrimental to high P/E companies like REA too? If rates go up asset values go down, including real estate. Some other companies with high P/E ratios have fallen considerably also.
Roger Montgomery
:
As I mention, in a rising bond rate environment, the ‘P’ in the P/E ratio declines, so investors need to invest in businesses where the ‘E’ in the P/E ratio compensates by going up.