ello (@piers)

Analysis: "Inflation in Australia and across the globe is not falling as hoped and it's raising serious concerns for the economy and asset prices. If inflation remains stubbornly elevated, interest rates will need to either rise or at least stay uncomfortably high for borrowers. "If they rise, asset prices, including property and shares, will have nowhere to go but down and the Australian economy risks falling into a recession. "We already have a window into this world, via the bond market, and it's looking rather dark. "The bond market measures how much risk is attached to an IOU. The higher the interest rate, the greater the probability money will go missing in action after being borrowed, either through default or erosion by inflation. "The interest rate on the Australian 10-year government bond is near a 15-year high, and the risk is it could move higher. "Rates on 10-year US government bonds are the highest they've been since the onset of the global financial crisis. "Investors are increasingly cautious about lending money to once seemingly infallible borrowers, like large Western governments. The anxiety around credit is putting enormous pressure on financial markets and the economy, and the risk is that it will worsen. "Author and former banker Satyajit Das describes the US economy as the critical "stress point" for the global bond market. "Major financial players are already stepping back from their once considerable exposure to the US. It was recently revealed that the Reserve Bank (RBA) reduced its holdings of US dollars (in its foreign reserves portfolio) by 10% in 2025, taking it back to 2012 levels. "[...] military conflict in Iran has also escalated, pushing the price of oil back firmly above US $90 a barrel. This, says AMP chief economist Shane Oliver, has undone any US efforts to artificially lower the interest rate on bonds. "Unless you get the budget deficit down in the US, in other words improve the fundamentals, any action by the US Treasury is just a temporary stopgap measure," Dr Oliver said. "It worked for a few days and then, of course, it's fizzled out again." "There is of course another strong current pushing bond yields higher — the once-in-a-generation investment in artificial intelligence (AI). Big Wall Street tech giants are spending billions of dollars on AI and associated infrastructure like data centres. "[...] The Commonwealth Bank's head of markets and rate research, Adam Donaldson, sees no end to the upwards pressure on bond yields. "There are very big structural forces pushing both interest rates and bond yields higher," he said. "But Donaldson's other point may send a shiver up the spine of every Australian mortgage borrower. "The market is sending a very strong message about what cash rates are going to average over time," he said. "When America's national debt surged to $40 trillion last week it led to a bond market sell-off which was countered by the US government. It's become an epic battle. The cash rate is what central banks, including the Reserve Bank, use to set monetary policy, and they heavily influence the cost of Australian variable rate mortgages. "He believes the combination of the "massive boom in AI, defence spending, the net zero carbon economy, various infrastructure requirements, and lack of [general governmental] fiscal discipline" are pushing up what he calls the "neutral rate." "That is the interest rate most central banks believe will keep inflation contained. In the US it's called the "R-Star", or the theoretical real interest rate that keeps the economy operating at full employment while maintaining stable inflation. "It's the interest rate sweet spot that keeps economies humming along and anything higher than that, in theory, causes businesses and households financial pain. "It has trended higher in the US from 1.36% (in the first quarter of 2025) to, according to the New York Federal Reserve, 1.65% for the second quarter of 2026. "CBA's Adam Donaldson argues confidence and credibility in the US central bank are at the heart of this bond market rout. "Relatively new Federal Reserve chair Kevin Warsh needs to prove to the world economy that he will set monetary policy according to the needs of the economy, not the Trump administration. If, Donaldson says, those "question marks get louder" about central bank credibility, the "bond market will fall harder," and interest rates will rise further. "Satyajit Das points out that 30% of US government debt is owned by foreign financial institutions, governments, and central banks. "They live on the kindness of strangers," he says. "You're going to see a massive re-jigging of the demand," for bonds, he says, as their risk increases. "All these pressures, Das says, "mean interest rates aren't likely to go down anytime soon". David Taylor, ABC #RBA https://www.abc.net.au/news/2026-09-08/bond-markets-interest-rates-mounting-risk-global-economic-crisis/107123348