01 Feb – 05 Feb 2016

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The yield curve continues its flattening trend as yields at the short fell less than those at the long end. Yields fell across the curve but investors continue to favour ten year bonds and yields on bonds with this maturity finished the week at yields not seen since late April. It’s all being driven from offshore of course with US 10 year bond rates at or near 12 month lows, European rates are being “jawboned” down by ECB President Draghi and ECB inflation forecasts have just been reduced again. Interestingly CBA came out this week and urged clients to sell long duration and switch to shorter duration bonds as it believed the current move that began in mid-December is due for a correction. Investors can readily sell 10 year bond futures and buy an equivalent dollar value of 3 year bond futures to implement that trade.

The 3y/10y bond spread fell another 5bps to 72bps as 3 year yields fell 4bps and 10 year yields fell 9bps again.

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