Over the past five years, as the RBA has cut the cash rate, Australian households have borrowed increasingly large amounts of debt, which are being financed at lower and lower rates. One consequence of this borrowing is that when the interest rate cycle turns and the RBA does start to increase the cash rate, the rate that is achievable will likely be structurally lower than those observed before the GFC. With interest rates at their current low levels, debt serviceability remains robust in the Australian economy. However, this dynamic will change quickly if interest rates were to rise. When the interest rate cycle turns and the RBA starts raising rates, it may be tempting to expect a return to ‘normal’ interest rates. However, in our view, this is unlikely—3% could well be the ceiling, as what was once deemed expansionary policy becomes contractionary. This means that interest rates should remain structurally lower for longer and that a sell-off in bonds in expectation of a return to ‘normal’ rates could provide opportunities to increase fixed income exposure. (VIEW LINK)