The end of the carry trade and stress on Australian bank margins

Short-term and long-term interest rates in the US have overtaken those in Australia for the first time in a number of years, with the Reserve Bank of Australia predicted to be on hold for another two years. This makes funding via US interest rates unappealing for investors in Australia, reducing bank margins, and potentially beginning an unwind in the Australian mortgage sector.

Here's how this works:

Loan growth in Australia swamps deposit growth, requiring additional funding needs for Australian banks
The US Federal Reserve raises overnight rates
Attracted by the yields, Australian fund managers move out of cash and deposits into overseas assets
To fund their balance sheets, Australian banks are then forced to increase deposit rates to attract deposits or must turn to money markets...


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