Bond markets have been reasonably complacent about continued low yields and in recent weeks YieldReport has warned readers that investors might be like ‘frogs in warming water’ whereby they become so used to the slowly changing environment, they don’t see the broader risks until it’s too late.
Last week was one of those sorts of weeks. The RBA left rates unchanged at its monthly board meeting as expected. On Wednesday, Australian GDP numbers showed the economy was growing faster than expected at an annual 3.3%. Bond markets would normally move higher on such news but inexplicably fell on the day. On Thursday the closely watched European Central Bank meeting decided to keep interest rates unchanged and not to increase the amount of bond-buying stimulus. This action began a bond market sell-off that saw offshore bond yields start to push higher and this move saw Australian bond yields push higher.
Following the ECB meeting eyes turned to US markets where a number of Fed governors such as Boston Fed President Eric Rosengren began to make perceived hawkish comments about interest rates. Rosengren is a known ‘dove’ and so his comments were taken as meaning rates a rate rise in September is more likely than it was a week ago. Given the perceived ‘blackout’ of Fed comments in the lead up to the US election, the latest comments are being seen as having a greater implication than they otherwise would have.
All in all it saw US and European bond yields move sharply higher and our market was not immune. 10 year bond yields closed the week up 11bps and early trading on Monday 12 September saw the 10 year bond yield move above 2.00% for the first time in two months. 10 year bonds were trading as low as 1.84% late last week so the latest move has numerous investors asking whether this is the start of a big move higher for bond yields.
Plenty have called the end of the 30 year bond bull market before this and there have been a number of false starts so the latest sharp move, albeit coming off a record low base level of bond rates, is sure to create nervousness among Australian bond investors.