Rates suggest it's a good time to fix

Interest rates are moving - but this time it isn't down. Not that your bank will tell you. Rates move in the money market initially, but the first you'll see of it will be in fixed-term mortgages.

Interest rates are moving - but this time it isn't down. Not that your bank will tell you. Rates move in the money market initially, but the first you'll see of it will be in fixed-term mortgages.

There are two giveaways. One is interest-rate futures contracts trading on the stock exchange. For two years these have been successfully predicting rates would drop, and how far.

Funnily enough, the further out they were predicting, the more accurate they were about the month the Reserve Bank would cut. And so the futures market had pencilled in an official cash rate of 2 per cent when economists were still boldly predicting 4 per cent. It's 2.5 per cent.

Mind you, the market is still half-heartedly predicting another cut by the end of the year. So it's tipping half a cut, even though a cash rate of 2.39 per cent is all you can be sure it won't be. More to the point, it sees rates rising next year.

Then there's the bond market with its formidable record of predicting the direction of rates. Except that for a long time the three-year bond yield was lower than the three-month rate, a sign of a slowdown coming.

Hang on, it was right. Isn't that what we're in? The best of the mining boom is behind us and growth so far this year has been nothing to write home about.

Touch wood, but the bond market has become more upbeat about the next three years. What's more, the 10-year bond yield has jumped about 0.5 per cent in three months.

If that doesn't sound like much, think of your mortgage or term deposit rising 0.5 per cent. In fact, going from 3.5 per cent to 4 per cent is a 12.5 per cent hike. That's a big deal in bond-land. Imagine the fuss that would have been made if it'd been the sharemarket falling that much.

Yet only a few bond tragics such as me noticed. Incidentally, the fall in bond prices - the obverse of their yields rising - will take some of the gloss off the surging sharemarket when it comes to your super, some of which is bound to be in government bonds.

Did I mention the banks make money when the longer-term bond rate starts rising? No surprise there, I guess. The reason is, it boosts the return on the capital they have to hold, and also makes it profitable to trade different maturities. The 4 per cent-plus they can earn on a 10-year government bond is more than they're paying on deposits, so it's money for jam.

Where was I? Oh yes, a rate rise is still a year off. Fixed-term rates move with the bond market so they'll be the first to give.

At the moment, some are lower than whatever the variable rate is, which is hard to tell because the banks are discounting like mad. They have to - the lowest non-bank variable rate is 4.49 per cent, according to RateCity. You can fix for three to five years under 5 per cent, which I'll bet is still below the banks' best discounted variable rate. So if you ask me, there's a case for fixing some of your mortgage. Only don't be conned by the rock-bottom one-year fixed rate. When you come out of it, the fixed-rate offerings will be much higher and the variable will be about to rise.

Read David Potts in Weekend Money, with

The Sunday Age.

Twitter @money potts