Government bonds performed well in January as bond yields fell around the world in response to equity market turmoil. This was especially so at the longer end of the yield curve. Government bond indices returned 1.388% over the month reflecting a strong move to the safety of bonds.
3 year bond yields closed at 1.87%, down 17bps over the month after trading as low as 1.82% and as high as 2.06%. 10 year yields finished the month down 25bps at 2.64%, with a low of 2.59% and a high of 2.89%. The 20 year bond yield finished at 3.15%, down 24bps with a low of 3.14% and a high of 3.38%.
As global equity and commodity markets were suffering in the first part of the month, the major beneficiaries were domestic and offshore bond markets. Firstly, commodity and equity sellers needed to invest somewhere and the surety of bond markets was the logical choice. Secondly, if the global growth rate was lower than previously-thought, bonds would be more attractive as lower growth would make (positive) returns from other assets less likely. Lastly, deflation was deemed more likely and bond holders would gain as inflation rates dropped or even turned negative. Despite strong employment data out of the US investors bid up the prices of investment-grade bonds (and pushed yields lower). In Australia, a more-than-expected headline inflation rate gave bond investors some nervous moments but closer analysis showed the underlying inflation rate had, in fact, fallen. It now sits at eth very bottom of the RBA’s target range of 2.0% to 3.0%.
When some calm returned to financial markets mid-month yields rose a little but not so in Europe, where the outlook for economic growth was still uncertain. ECB President Mario Draghi spoke of “downside risks” and indicated an easing of ECB monetary policy was being actively considered.
Then, out of the blue, came the surprise Bank of Japan decision to implement a negative overnight interest rate in a further bid to generate economic growth. Yields plunged in Japan with major bond markets following suit. Yields on 10 year bonds in advanced markets finished at lows for the month. Rates may well have gone lower except for the release of US fourth quarter GDP figures which were not as gloomy as some had anticipated.
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