Commentary courtesy of Spectrum Asset Management’s Lindsay Skardoon.
| Close | Prev Close |
Change | |
| U.S. 2 year bond% | 2.10 | 2.13 | -0.03 |
| U.S. 10 year bond% | 2.82 | 2.84 | -0.02 |
| U.S. 30 year bond% | 3.13 | 3.11 | 0.02 |
| 90 day bank bill% | 1.77 | 1.77 | 0.00 |
| Aust. 3 year bond%* | 2.18 | 2.15 | 0.03 |
| Aust. 10 year bond%* | 2.89 | 2.84 | 0.05 |
| Aust. 20 year bond%* | 3.30 | 3.26 | 0.04 |
| * Implied yields from Mar 2018 futures | |||
U.S. BOND MARKETS
Bond investors hate large deficits and even more so increasing inflation, combine that with no more central bank money and increased issuance, the tantrums that we are seeing in the bond market are only just the start. The 30-year treasury auction today saw soft demand with the bonds barely trading through the issue level. The 30-year traded at 3.14%.
Bond yields could rise dramatically if and when it becomes apparent that 3% growth won’t be achieved or maintained. It’s a circular argument but one that leads to significantly higher rates. Nerves will be frayed, and investments held back as traders’ search for more reward on the risk. If Trump does not get his touted 5% growth rates, then the 30-year could easily back up to 5% if the deficit keeps ballooning and growth is stuck around current levels. William Dudley has suggested that he would support 3 rate hikes this year if the economy continues to grow. That’s a big drag on growth should those tightening’s occur.
LOCAL MARKETS
Bonds will stage a rally coming into the end of the week and also in response to the U.S. market. The AUD 10-year versus the U.S. 10-year is now about 3 bp. Aussie bonds can rally through this spread however the currency may feel the pressure. AUD to be pressured on the day.
