Long term fixed rates look unattractive

Thursday, September 24th 2009, 11:30PM

Mortgage rate news is a little like the weather at the moment. After experiencing spring sunshine under a big high pressure system, we then get buffeted by a low.

A week ago we rejoiced about short-term interest rates, particularly floating rates hitting levels we hadn’t seen before. Floating rates from the big banks are down as low as 5.69% after being in double-digits not that long ago.

This week the story is quite different. Long-term term interest rates have risen again and they look like going higher yet.

We’ve picked on Westpac to illustrate what’s happening as it is the main bank that hiked rates this week. However TSB Bank has also increased its three and five year rates to 8.20% and 8.50% respectively.

In this graph we have compared Westpac’s rates at the start of the year with its rates today and a week ago.

The picture is stark. Nine months ago the yield curve was flat and what economists would call slightly inverted – that is short-term rates were higher than longer term ones.

Today the curve is steep and positive with long term rates significantly higher than short term ones.

There are two messages in this story. The first is that it is pretty clear the only place to be is short term rates. Sure they will increase (probably around June next year), but there is a heck of a lot of increasing to go to flatten out the curve.

Secondly the forecast is that longer dated rates will continue increasing. We expect that other banks will follow what Westpac has done. ASB’s rates are already higher than Westpac’s rates. The former’s five-year rate is 8.60% compared to 8.49% for the Big Red.

Also history shows us that when one bank increases its rates others aren’t shy at following.

Backing up this view that longer term rates are on the rise is comments from economists. Many noted in their economic reports this week that there are signs international markets are slowly recovering. As that happens interest rate rises are inevitable.

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