With Westpac making two sets of changes to its interest rates in the past week we thought we'd use the big red bank to illustrate the major trend in the home loan market at the moment. At the start of the year (blue line) the yield curve was pretty flat and slightly inverted with the floating rate higher than longer term rates. Since then we have seen a huge change and the yield curve move to one which was very steep. This has been accentuated in the past week as Westpac further reduced short term rates and also increased medium to long term rates (green line).
Our expectations are that this picture will stay this way for some time and the curve may even end up being stepper than it already is. The reasoning behind this is that there is a view global markets are steadily on the improve and as that happens longer term rates will continue to be pushed up. However, short-tem rates (which are influenced by local conditions) are likely to stay down for some time yet.
This graph starkly illustrates that the place to be for home loans at the moment is the short-end of the curve.
