A global sell-off in government bonds, a market most Australians rarely think about, could add thousands of dollars to mortgages, hit superannuation balances and push politicians toward tax rises or spending cuts, according to analysis by political commentator Peter van Onselen.
Van Onselen writes that while the Reserve Bank of Australia is widely seen as the body that sets the price of money in Australia, that is only half the story. The other half, he says, is written on trading desks from New York to Tokyo to London, in the global bond market, where investors are demanding higher returns for lending money than they have for many years.
A bond is a tradable IOU. When the federal government spends more than it collects in tax, it covers the shortfall by selling bonds to investors such as banks and superannuation funds, promising regular interest payments and full repayment by an agreed date. Commonwealth bonds set the baseline price of borrowing in Australia, since the federal government is the safest local borrower. Banks and businesses pay that baseline rate plus a risk margin, and households sit further down the same chain.
Bond prices and yields, the return investors demand, move in opposite directions, van Onselen explains. If an existing bond pays $4 a year on a $100 investment but rising inflation means investors can get $5 elsewhere, nobody will pay the full $100 for the old bond, so its price falls until the return becomes competitive. When investors sell off bonds this way, prices drop and yields rise, and governments borrowing money must match the new, higher yields without any RBA meeting or ministerial announcement.
Yields at 15-year highs
Australia's 10-year government bond yield is around 5.2 per cent, the highest level in more than 15 years, up from a pandemic low of just 0.55 per cent, according to van Onselen. Australia's borrowing costs have already reached a 15-year high.
The pressure is not confined to Australia. Yields in the United States and Japan, along with borrowing costs in Britain and continental Europe, are also at multi-year highs, and van Onselen notes that most of those countries carry even higher debt loads than Australia. He attributes the moves to stubborn inflation, large government deficits, and central banks being forced to keep interest rates higher for longer.
The OECD estimates that governments and companies will raise a record $US29 trillion from bond markets this year, twice the amount borrowed a decade ago. Among OECD governments, 78 per cent of that borrowing will simply refinance debt that is already maturing, meaning more borrowers are competing for the same pool of lenders.
What it means for mortgages
A rising 10-year bond yield will not change a variable mortgage rate overnight, since that is driven mainly by the RBA cash rate. But van Onselen says higher market yields put upward pressure on new fixed mortgage rates, and signal that investors expect the cash rate to stay high, since the same inflation fears pushing bond yields up also force the RBA to raise rates.
He warns that mortgage holders risk being squeezed from both ends, by the RBA at home and by global investors abroad. On a $600,000 principal and interest mortgage with 25 years remaining and a starting rate of 6 per cent, a full percentage point rise costs roughly an extra $4,500 a year, van Onselen calculates.
Superannuation and the Budget
Commonwealth gross debt is hovering around $1 trillion, according to van Onselen. As older bonds mature and are replaced at higher rates, the government's interest bill keeps climbing, leaving less money for spending programs or tax relief. He argues that eventually the government must cut spending, raise taxes or borrow more, with the last option only adding to the problem.
Businesses are also affected, van Onselen writes, as investment stalls and hiring slows, while higher returns on safe bonds put downward pressure on share and property values, threatening superannuation balances.
No imminent default
Van Onselen stresses that Australia is not facing an imminent default, since its debt-to-GDP ratio is better than many of its peers. Instead, he describes the real threat as a slow bleed of painfully high mortgage rates, stalling businesses, weakening asset values and an ever larger share of tax revenue disappearing into interest payments that do nothing for the country.
He argues that while the government cannot control the global economic conditions driving the sell-off, it can control how exposed the federal Budget is when the pressure hits, and that adding more structural spending while inflation remains high forces the RBA and taxpayers to absorb more strain. His conclusion is that Australia cannot dictate the global price of money, but can decide how much it borrows, and that now is a time to tighten spending rather than add to the pressure.
