Property seeing fastest price rise in 17 years - what about rates?
The past fortnight has seen a financial wind shift. Bond yields are on the way up, as are inflation expectations, but experts insist the long-term outlook for investors remains steadier than these developments might portend.
Last week, the bond market experienced a sell-off, with yields (which move inversely to bond price) on the Aussie 10-year government bond and US 10-year government bond soaring 20 and 23 basis points respectively.
The bond sell-off and corresponding yield increase have been spurred by suggestions from US Federal Reserve chair Jerome Powell that inflation could be on the way.
"We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects," Powell said at the Wall Street Jobs Summit. "That could create some upward pressure on prices."
The bond sell-off and Powell's comments spooked global stock markets. On Wednesday the Nasdaq, home of America's tech powerhouses, fell 0.43%.
Closer to home, the RBA responded to the yield moves by bringing forward some of its bond purchases, as part of its commitment to anchor the 3-year bond yield to 0.10% target.
"Bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market," said RBA governor Philip Lowe.
The goings-on here and abroad are significant, but experts don't expect borrowing to get costlier any time soon.
"Today we received confirmation that the RBA is in no way contemplating adjusting its current monetary policy settings, and reconfirmed its commitment to a sustained economic recovery," says Anthony Doyle, cross-asset specialist at Fidelity International.
"It continues to maintain that significant gains in employment are required to generate materially higher wages growth. As a result, it reconfirmed its guidance that this is unlikely to occur until 2024 at the earliest."
Steven Miller, an investment strategist at Grant Samuels Funds Management, says the reserve bank is holding firm on rates to stop the Aussie dollar from taking off.
"The world's central banks are playing a game of competitive devaluation - a currency cage match," he says.
"The RBA has no choice but to remain in the cage by maintaining measures whose purpose is, among other things, to prevent the AUD from appreciating to a level that compromises international competitiveness and compromising its activity, employment and inflation objectives."
Then there's the all-important impact rising rates would have on the property market, which, according to CoreLogic, is seeing the fastest price increases in 17 years.
"The outlook may be positive, but we're not out of the woods yet," says homeloanexperts.com.au CEO Alan Hemmings.
"Given the current property price spike and the lack of stock, there are still too many variables for clients who are going through the approval process and any changes now could spell disaster for those potential homeowners."
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