08 Feb – 12 Feb 2016

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The yield curve continues its flattening trend as yield falls at the short end were much more modest than those at the long end.

Investors were spooked by concerns regarding the state of bank balance sheets in the US and Europe and bought government bonds in droves, particular longer dated bonds. The yield curve is often used as a proxy for a country’s economic outlook with a steep yield curve indicative of growth and the inflation which comes from an economy straining against capacity constraints. A negative yield curve indicates the opposite; lower-than-trend growth and low inflation. In Australia, it is little more complicated as short term rates are driven by the RBA’s cash rate while longer term rates are benchmarked against comparable US rates. But with Australian 10 year bond rates coming within 10bps of all-time lows at 2.30%, and relatively close to the 2.00% cash rate the yield curve is decidedly flat.

bond-curve-12feb
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By the end of the week European and US 10 year bond rates recovered but those increases did not translate to the domestic market and the 3y/10y bond spread fell another 5bps to 67bps as 3 year yields fell 8bps and 10 year yields fell 13bps. This is the lowest the 3y/10y spread has been since April 2015.

bond-spreads-12feb

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