Investors Say A Big Farewell To Bank Bill Futures

The Age

Friday January 26, 2007

MARC MONCRIEF, FINANCIAL SERVICES REPORTER

PUNTERS fled from bank bill futures in record numbers after lower than expected inflation figures seemed to put off the menace of higher interest rates - but on the fringes, contrary voices emerged.

The Sydney Futures Exchange issued a statement saying Wednesday had brought record trading volumes on 90-day bank bill futures, which move with market expectation of interest rate movements.

The yield on the bills fell from 6.54 per cent to 6.41 per cent. Last Friday it had reached 6.57 per cent as investors fretted over the possibility that Wednesday would deliver an inflation figure high enough to prompt the fourth interest rate rise in 10 months.

But prices, excluding one-off dips including petrol and banana prices, increased just 0.5 per cent in the December quarter and sat at 3 per cent for the year. The figures were well below expectations and the SFE's statement said 361,292 90-day bank bill contracts, representing $361 billion, changed hands.

The day broke the previous trading volume record, set on April 6, 2005, by 23.6 per cent.

"It was certainly a big day," said CommSec debt market strategist Adam Donaldson. "The numbers categorically ruled out a February rate rise." The bills fell further yesterday to close at 6.40 per cent, showing that even after consideration, investors thought an imminent rise nearly impossible. The yield on 90-day bank bill futures tends to track about 0.15 percentage points above the expected interest rate, which is now 6.25 per cent.

But a research note from TD Securities suggests inflation would continue to be a problem.

The note shows prices rising in industries not directly affected by the flow of cheap products from China. For example, the cost of child care increased 12.6 per cent in 2006 and rent for housing increased 3.7 per cent - the highest increase in 16 years.

Stripping out the so-called "China effect" and the volatile price of petrol, TD Securities global strategist Stephen Koukoulas calculated inflation would have been 4.5 per cent. "This is probably a fair measure of the current inflation problem in Australia," Mr Koukoulas said in the note.

"It is also why there is still a very strong chance that the RBA will hike interest rates again in the months ahead."

"At a hint that the China-effect is waning, or indeed petrol prices edge up . . . we may see some uncomfortable inflation results over the course of 2007."

But many economists scoffed at the idea of removing China from the equation.

"You exclude things that might be temporary," said ANZ chief economist Saul Eslake.

"Anyone who suggests what is going on in China is temporary or might be over soon needs to visit planet Earth."

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