In May bond yields fell on the back of domestic news but in June it was all driven by offshore events. Brexit was clearly the major event that shocked markets but prior to that investor demand for sovereign debt was fuelled by soft economies in Europe and Japan. Investors were also driven by doubts over US Fed “rate normalisation” plans in the wake of a “shocker” May US non-farm payrolls report and despite Janet Yellen reiterating her expectation that gradual rate rises were coming. The lack of a positive yield in Europe is said to be behind demand for the low, but positive, yields available in the US.
Central bank bond purchase programmes in Europe, Japan and the US continued to add fuel to the fire. Yields on German bunds and JGBs hit new record lows early in the months, as did Australian ACGBs. At one point every Japanese government bond of 40 years and below was leass than 10bps with most being negative. By mid-month, all eyes were on the EU/Brexit vote and Australian ten year bonds made a new record low below 2.00% as yields followed offshore leads in the absence of any primary economic data.
In the last few days before the Brexit vote, yields had at first rallied as markets fretted about a successful Brexit vote. On 16 June a UK pro-Remain Member of Parliament, Jo Cox, was murdered by an attacker that was apparently pro-Leave. The disturbing incident was seen to shift public sentiment towards remaining in the UK and bond yields weakened quite sharply. This intensified in the hours leading up to the vote as financial markets became increasingly confident of a “Remain” victory. Alas, the crystal balls were not working particularly well that week; the “Leave” vote triumphed and yields plummeted to new record lows. Yields stayed at these lower levels and by the end of the month, the Australian 3 year bond yield finished at 1.49%, down 13bps while 10 year bond yield finished down 33bps at 1.99% and the 20 year bond yield fell 37bps to 2.54%. Given the large falls it will come as no surprise the Bloomberg Government Bond Index was again the best performing bond index with a return of 1.803% for the month.
AUST GOVT BONDS
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