Domestic data releases had little effect on the Commonwealth bond market this week and yields took their lead from offshore. Central banks in the US, UK, Japan and Switzerland all decided to leave official rates unchanged and there were no great surprises there. As ANZ put it, “On the data front, while some aspects are showing positive signs, others are slowing, and this is creating a conundrum for central banks and policymakers.”
All eyes, including those of the US Fed, seemed fixated on the UK’s upcoming 23 June Brexit vote (whether to stay part of the European Union or whether to leave). The referendum closes at 7am (AEST) on Friday 24 June and it’s worth remembering this is a vote which is non-binding and has no immediate practical effect. Nonetheless it is a binary outcome and will potentially change the course of history if the UK votes to leave. On one side is Prime Minister Cameron, running what some have described as “Project Fear”. On the other side are those such as recent London mayor Boris Johnson who argue that unelected European bureaucrats hold way to much sway of the UK’s sovereignty. What those effects will be is open to debate but finding a positive spin on them is as likely as finding hen’s teeth. When the BoE says it has contingency measures ready should a financial market panic eventuate following a “Leave” vote, finding positives is a little difficult.
The vote has become a focus for investors and over the past week, 10 year bond yields fell in the English-speaking countries while bonds in other advanced economies rose. US 10 year yields fell 3bps to 1.61%, the comparable UK yield fell 9bps to 1.14%. The safe haven buying at one point saw Australian 10 year bond yields hit a series of new lows during the week, at one stage dropping below the 2.00% level. However, at the end of the week yields bounced locally and the 10 year yield finished at 2.08%, down 4bps over the week. French and Italian bonds rose 4bps and 14bps and German bonds yields were steady (at just over zero).
This week $15.9 billion of the June 2016 government bonds matured and there was one standard bond issue of $1 billion worth of November 2027 bonds plus an issue of index linked bond August 2035 bonds. They were sold with coverage ratios of 2.055 and 3.04 respectively. The bond futures contracts also matured this week with September now the spot contract.
AUST GOVT BONDS
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