Commentary courtesy of Spectrum Asset Management’s Lindsay Skardoon.
| Close | Prev Close |
Change | |
| Aust. 90 day bank bill% | 1.77 | 1.77 | 0.00 |
| Aust. 3 year bond%* | 2.16 | 2.13 | 0.03 |
| Aust. 10 year bond%* | 2.92 | 2.85 | 0.07 |
| Aust. 20 year bond%* | 3.33 | 3.27 | 0.06 |
| U.S. 2 year bond% | 2.18 | 2.16 | 0.02 |
| U.S. 10 year bond% | 2.91 | 2.90 | 0.01 |
| U.S. 30 year bond% | 3.17 | 3.16 | 0.01 |
| * Implied yields from Mar 2018 futures | |||
LOCAL MARKETS
Aussie bonds are flat to U.S. 10-years. After a bit of consolidation in the U.S. market, we could probably expect the same today. I expect some book squaring as we head into the weekend that probably should mean a more positive day today.
U.S. BOND MARKETS
Risk is back on the books and everyone is hoping that the U.S. 10-year holds around 3%. With almost three times more issuance, an expectation that central banks will be buying fewer bonds to almost no bonds and a potential deficit blowout should the economy fail to generate in excess of 3% growth, bonds look very vulnerable. Forget about inflation that’s just noise. Any slowdown in GDP will have bond traders scurrying away to sell because they know a ballooning deficit has to be funded and that means even more bonds have to be issued and into a marketplace with fewer participants and less liquidity than what was previously there because of changes in the banking regulatory environment. When the time comes who will provide liquidity. The banks can’t.
The markets are not going to unravel anytime soon however the risks are there, and many investors are just hoping these problems will never eventuate. A lot of 2018’s returns will be predicated upon a growth rate in the U.S. at 3% or higher and to continue into 2019.
The bond market today was reasonably steady. The 2-year came off a nine-year peak and the 10-year consolidated. Ten-year bonds have moved 50 bps so far this year. Fed funds are pricing a better than 80% chance that the Fed will hike in March. The short-term market consensus is now pricing or expecting 4 hikes in 2018.
