It is often said that when America sneezes the remainder of the world catch cold. Finance is a typical example of that because the finance markets of the world are so closely linked. When a market the size of the USA has a problem all other markets see that lending money to them has an added risk so they raise the interest rates to counter the added risk element of making a loan.
It affects Australia, and all other nations, in the following manner:
- Banks and mortgage funders buy the money to fund your mortgage loan at the 90-day bank bill rate. (This rate is set by supply and demand worldwide and being a free market rate it floats up and down by the minute.)
- At this moment the 90-day bank bill rate is higher than the Australian FRB official cash rate. This means that both banks and non-bank lenders are paying more for the money the buy.
- This means that the Australian FRB official cash rate is irrelevant to the market. It can be compared to a radio commentator stating on the 8am news that bananas are selling in the supermarkets at $2.50 a kilo. When you get to the supermarket they are all priced at $3.50 a kilo. You now have a choice to buy the bananas at $3.50 a kilo or not buy them at all. Why? Because the statement made on the radio is irrelevant to the existing market conditions.
- Many ask why the lenders cannot ride this tide of high cost money until the market stabilizes? History tells us that the cost of money will stabilize at some time; what it doesn't tell us is whether rising interest rates will stabilize this week, next month, the year after next or some ten years from now. The next thing you need to understand is the profit margins on loans.
- The difference between what you, the consumer, pays for the loan and what your lender pays for the loan is between 1% and 1.5%. Due to normal market competition it is often closer to 1% and therefore there is virtually no space between what they make on the loan and the costs of running their businesses for them to soak up any rise in the cost of the raw materials. In this case money is the raw material. Therefore they have no option but to raise the rate that they charge you.
During the past week (commencing Monday 24 September 2007) almost every lender, both bank and non-bank, have made adjustments to their loans by either raising rates or reducing the amount they are prepared to lend due to interest rates rising. But this is for the next article. Keyword: Australian cash rate, mortgage loan, finance markets, mortgage funders, Australian FRB, lenders.
Are Interest Rates Rising
As I've said, interest rates are set based on the yield in the bond market at any given time. Let's show an example. If, for example, a $100,000.00 bond falls in value to $95,000.00, the corresponding yield (return) is significantly higher. Because the yield is higher, the prevailing interest rate that is set for the mortgage must offset the higher yield and provide a return on the mortgage for the lending institution. With all things being equal, the rates on fixed rate mortgages would tend to rise.
Multiple Forces in The Economy
There are many factors influencing interest rates for your California home loan in the US economy. Higher interest rates can cause fluctuations in the stock market which in turn affects the bond market. In fact, the bond market and the stock market are opposite sides of the same coin. One can't move without the other. If the US Dollar rallies, bonds dip; when oil prices dip, bonds can as well. Generally speaking, when the bond market is up, the stock market is down. In addition, if economic news is worse or better than expected, it will cause a fluctuation in the US dollar currency pairs in the spot Foreign Exchange market (the FOREX), which can affect the bond market and in turn rates.
A quick example. A couple of weeks ago from this writing, the US New Jobs report was projected at 350,000 -- it only came in at 10% of that or 35,000. Once the report was announced, literally IMMEDIATELY the GBP/USD currency pair (Great British Pound and US Dollar) spiked upward. The GBP dramatically increased in strength with the US Dollar becoming weaker. One FOREX trader I know literally made $3,500 in five minutes as he projected the claims to be much less than expected.
Also, interest rates dropped that day due to the lackluster jobs report. Coming into the office that day, a wise loan agent would have locked some loans or at the least knew interest rates would had gone down that day. Truly, the US economy is a highly interdependent organism that is very fluid and dynamic -- it is never static or motionless. Some of the key economic indicators that affect the economy, and in turn interest rates, are:
Durable Goods Orders
New Home Sales
US Trade Balance
Jobless Rate
Weekly Initial Jobless Claims
Fed Chairman Speech Before Congress The key economic indicators that can affect the bond market with corresponding fluctuations are:
Consumer Confidence
Retail Sales
Manufacturing Activity
Industrial Production
Jobs Growth
Inflation
There you have it. There are many forces at work in determining what your rate is on any given day. So the next time you ask a loan agent, "what are rates like today?" You'll see there's a lot behind it.
Both David Mccarthy & Glenn J.n. Reschke are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
David Mccarthy has sinced written about articles on various topics from Finances, Lose Weight and Family Concerns. Article two is available at: http://www.financeacf.com/lending-process.html. Author David McCarthy Article 1 is cop. David Mccarthy's top article generates over 12100 views. Bookmark David Mccarthy to your Favourites.
Glenn J.n. Reschke has sinced written about articles on various topics from Finances, Travel and Leisure. For more information on getting the best loan possible, or to visit this article's original page, go to Look For A Great Mortgage Onli. Glenn J.n. Reschke's top article generates over 480 views. Bookmark Glenn J.n. Reschke to your Favourites.
Buy An Electric Cigarette To find out further information on fireplace parts so that you can keep your fireplace in tip-top condition
